Silver Is Cheap - Is It Time To Buy?

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Includes: AGQ, DBS, DSLV, PSLV, SHNY, SIVR, SLV, SLVO, USLV, USV, ZSL
by: Don Durrett
Summary

Excellent risk/reward opportunity.

The gold bull market could resume soon.

Twice the leverage as gold.

Bullion banks are long silver for first time in 24 years.

Silver is cheap. In fact, it has been sub $16 since late June and is currently below $15. It is so cheap, that bullion banks are long silver for the first time in 24 years! Follow this link for confirmation.

Currently silver it is trading at $14.06 (see chart below), which is 85x less than gold ($1200/$14). That ratio is reaching record levels. The historical ratio was about 17 when silver was used as money. If silver is ever treated as money again, then this ratio will drop dramatically.

I expect the current ratio of 85 to drop by at least half. In fact, in 2011, that is exactly what happened. When gold rocketed to $1935, silver peaked at $49. That is a ratio of about 39. For this reason, I think silver has about twice the potential return of gold when a breakout occurs.

The all-time high for silver was reached twice. Once in January 1980 at $49 and then again in April 2011 at $49. This double top will likely be eclipsed, and I think it could happen soon. Once we get to $35, those all-time highs are going to act like a magnet. If we reach $35 in this next breakout and don't retest $49, I will be very surprised.

What makes silver so interesting is that the all-time high adjusted for inflation is around $150. If we get a new high adjusted for inflation, then the return will be close to 1,000%. With the long-term downside potential of silver very low versus its current valuation, the risk/reward is one of the best investments on the planet.

I prefer to focus my analysis on gold because I believe that gold will lead the way for higher precious metals prices. However, if gold does break out, I would expect silver to follow and eventually to outperform by a factor of 2.

August was a continuation of the drop in gold prices that began in April (see weekly chart below). We have now had a 20-week correction. Back in March, I was optimistic and thought the charts and macroeconomic environment were setting up gold to have a good year. However, I was wrong and now I need to reassess.

The first thing to look at is the charts. Below are the weekly gold and silver charts since 2007. They are actually not that bad. Both are holding long-term support. Gold's support line goes back to 2013 and silver's to 2014 (see charts below and green support lines).

If we can have a positive September for both gold and silver prices, then our support lines will be intact. Moreover, the tight channel that has occurred over the last 4 to 5 years creates a very solid base from which to blast off. That's exactly what you want to sustain a big rally in prices, and any breakout is likely to hold with that kind of base.

So, for September and the rest of the year, we want those support levels to hold. If they hold and we get a breakout, then the charts are going to look very good. Good looking charts always bring in big money from traders. This could lead to a momentum trade in gold and silver. The traders are going to love that base. We should see big money jumping in around $1335 for gold and $17 for silver. Until then, I expect the precious metals markets to be quiet.

Will we see $17 silver or $1335 gold this year? I have no idea, but I think there will be some type of rally after this 20-week correction. A run to test $1300 could easily happen over the next few months.

Conversely, it's always precarious to be sitting on major support. Especially a support line that is several years old. If support breaks down, we could be looking at very ugly numbers. It's not a crazy thought to consider gold retesting the 2015 low of $1045 in the next few months. Hopefully we won't see that happen, but if it does, I would expect a rally to follow shortly thereafter.

Okay, now let's look at the economic side of the equation. The chart below shows the current weakness of the US economy. This chart shows real US GDP growth since 1958. The green line shows the initial success of globalism from the mid-1980s until 2007, but also its false promise. While GDP numbers appear to be good this year, in fact, they have been relatively weak on a real basis.

This chart shows what we all know: it doesn't feel like we currently have 3% or 4% growth. It feels more like a very sluggish economy, where business investment is nowhere near vibrant. I lived through the 1980s and 1990s, and back then everyone was making deals and building small businesses and new large companies were appearing in droves. Can you name a new large company that has appeared since 2010? Perhaps Tesla, but it was formed in 2003.

Here is the current situation as I see it.

1. The US economy is weakening and has been weakening since 1971, when we left the gold standard and our manufacturing sector began to decline. In 1971, manufacturing was about 20% of the labor force. Since then, it has steadily declined. Today it is about 9% of the labor force. This has decimated the middle class, which has had zero growth in real wages since 1971.

2. The US standard of living has been augmented by debt since 1971. This augmentation has created a false sense of wealth that doesn't really exist. At some point, this facade must show its face. In many respects, the end result will be similar to someone living off a credit card and having their card canceled. The inevitable outcome is going to be the US government defaulting on their debt and effectively declaring bankruptcy.

3. Since 1971, the US has been trying desperately to maintain its standard of living through debt and a strong military, along with a hyperactive foreign policy focused on economics and bullying tactics. These tactics are focused on one thing: US economic might. The result so far has been successful, with many nations effectively subsidizing the US economy by using dollars for trade, thereby keeping the dollar strong. International trade in dollars is what makes the dollar the global reserve currency, and what gives it strength. From this position of strength, the US is able to sell its debt (US Treasury Bonds) to foreigners, who purchase about half of our debt. Thus, foreigners are effectively subsidizing our debt addiction. At some point this will end, and the dollar will crash. And when it does, gold will explode in value.

4. The focus of US economic policy since 1980 has been globalism, thereby allowing US corporations to extract wealth from international trade. This wealth was mostly transferred back to the US, whereby the 1% became exceedingly wealthy. This came at the expense of the middle class which increasingly shrank and lost its strength.

5. The US economy has now become a hollowed-out shell that relies on debt and government manipulation of the economy. The US economy is on its last legs, with only a few more years at its current strength. Once it falters, the fall will be hard and harsh, likely ending in the demise of both the dollar and America as a nation in its current form.

6. The US is competing economically with other nations. These nations are intelligent enough to understand the facts above. They know that the demise of the US economy is nearing. They are concerned with how this will impact their economies and are positioning themselves for this outcome. Moreover, they recognize that the dollar as the global reserve currency is ending, and along with it, America's ability to fund its debt. This implies a looming crisis of major proportions.

Okay, now what is going to cause the US debt bubble to pop? I have no idea, but either of these would probably do it:

1. A stock market crash in the US could ignite fear that the US economy may be entering a crisis from which it might not recover. This could lead to a lack of confidence that US Treasuries are safe to buy. The end result could be a failed US Treasury auction, which would lead to higher interest rates and perhaps a negative feedback loop. Whereby, as rates rise, fewer buyers appear.

2. The Chinese and Japanese both know that their $1+ trillion in US Treasury holdings will never be paid off. At some point, one of them is going to start selling. This could easily lead to a mass global selloff of US Treasury bonds. I don't think it will be either of these two countries that begins the selloff. But once the selling begins, one of these countries will jump in, and then it's all over. At that point, the US will have to default on its debt, because it will be impossible to issue new debt.

Because of the arguments I have presented, I think that gold and silver are going to break out soon. We are already seeing rumblings and something could unfold at any moment. It may seem like the US economy is stable and likewise that the bond market is stable, but I don't think that's true.

Another reason I think we are close to a breakout is because there aren't any gold/silver mining stocks (producers) that I want to buy at their current valuations. None of the quality producers are cheap. To me, this means that investors are expecting a breakout and are holding on to their quality mining stocks. Call it a feeling, but I don't think we are going much lower. I think the good entry prices are mostly over. There are a few good companies left, such as Hecla Mining, New Gold, Hummingbird Resources, Alio Gold, Argonaut Gold, and Leagold Mining, but for the most part, nothing of quality is very cheap.

Let's look at one final chart. Below is the HUI chart since 1999. As you can see, it's above support and has been in an uptrend channel since 2001. I think it is highly unlikely that the HUI is going below that 17-year support line. If that's true, then we can expect the gold and silver support levels since 2013 and 2014 to also hold. In other words, we could be very close to a sustained breakout in gold and silver. A breakout that could last years.

Looking at the chart above, we probably will remain close to the support line for at least a month or two, but then we should begin an uptrend back above 200. My guess is that we will trade above 200 before January, although it wouldn’t surprise me if we stay under it for the remainder of the year. The bad news is that it looks like it will take at least a couple of years to reach a new high above 600 - unless we get some type of parabolic blast off.

Final conclusion. The gold bear market that began in 2012 is just about over and could be ending in the next few months. This return to a gold bull market will likely push silver higher, and potentially to a new high.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.