Silver Leading the WayBack in early May last year, I did an essay entitled "Will silver lead the way?". I discussed the large Comex open position in silver and speculated that silver would be leading gold in the strong and sustained bull market to come. The reasoning was based on the disparity between the size of the position and the amount of annual production and the fact that demand has exceeded supply for more than a decade.
The essay reads ... "This means that if the silver price should show a sustained increase, there will be no slack in production that can be used to cover the short position. Should the shorts be squeezed, the price would skyrocket." It also referred to Ted Butler of www.butlerresearch.com and his view that a tenfold jump in the silver price is quite possible. At the time when the essay was written, silver was trading around $4.70, which implies a silver price of as much as $50/oz. Even from today's price of $7.20/oz a move to that level would still be a seven-fold increase.
A good return on what surely has to be a near certainty, unless something very strange happens. Even if the price only makes it halfway to the $50 level.
In May a year ago, gold was trading at $342. It had just started a recover again after the February sell-off when the price was bashed down from near $390 down to below $320. Silver also suffered in February, falling from over $4.90 to $4.41. However, its decline of just over 10% was proportionately much less than the 17% fall in the gold price. The gold recovery, from a deeper over-sold position, was doing better than silver and it was a bit of a "stick neck out" to express the view that silver would really lead the way higher.
Subsequent to that essay, events favoured gold as the leader. At first gold slipped a little, moving back to $340 by mid-July, but then there was a well-sustained rising trend that took the gold price to over $425 early in January.
Between May and July 2003 silver at first fell back to $4.48 -- then it too started a rising trend. However, the trend was very choppy; while the general move was higher, there were severe corrections or pull-backs that must have created much nervous tension for the silver bulls of the time. Despite this disorderly advance, silver managed to gain 20% by mid November from its post-May low, compared to the 25% improvement in the gold price over much the same period.
When gold reached $425 early this year, many expected it to rise and test resistance around the $440 level; at that time few people would have bet on silver as the real leader of the two metals. Nor was it expected to catch attention with a steep and near-explosive rise in the price. This good move in gold also brought me to consider a new essay to say that the first one on silver in May last year had been proven incorrect.
Yet it did not take long for the gold price to come under pressure and finally nose-dive to below $400 late in February. Since then it has failed to make a definitive break back into $400 territory. However, during this time when gold peaked and fell back below $400, the price of silver left the $5.20 level of November last year way behind, to gain almost 40% and reach its new highs of last week around $7.20. With these developments it turns out that silver has now finally grabbed the initiative and is leading the charge out of the tight stranglehold in which these two metals have been constrained for the past decade. Gold is sure to follow once silver has ignited wider interest in the precious metals.
As increasing global tensions and growing distrust in the US economic recovery cause more investors to start thinking seriously about the safe havens of last resort - precious metals, gold and silver - "real" money.
So much for the "Gold is dead" slogans since the 90's. So much for the demonetisation of gold -- and by implication silver as well.
As always in the markets the two questions to which investors would most like accurate answers are, "When?" and "How far?"
Let us see what kind of answer can in fact be obtained from technical analysis. There is a widespread belief that TA cannot work for gold or silver because these markets are being manipulated to a degree that makes analysis inaccurate, even invalid. This view may well be correct for some approaches to technical analysis, but pattern analysis by Chart Symmetry has had remarkably powerful results.
Chart patterns have their origin in the complexity of markets. Research has shown that large adaptive systems - called complex systems - display emergent symmetry. Some features of the system repeat. A market is a large adaptive system and just like so many other complex systems, is based on a few simple rules. Underlying the complexity of markets is the decision process of buying and selling by a large number of market partcipants and their perceptions and expectations.
People who manipulate the market are a part of this complex system; they too have to decide when to buy or when to sell, even if their purpose is manipulation; their decisions are made in the light of what is happening in the market, their interpretation of this and what they anticipate to happen in the future - just like any other market player. They focus strongly on certain levels that they intend to defend, but so do other market players who have decided on stop loss or profit- taking levels.
Extensive and massive manipulation can steer or influence the market. Just as a large new buyer who enters a market has an effect on price behaviour, with no intention of manipulation. It simply happens that way. However, the manipulation is part of the complex system and the system adjusts to it -- and in the process, patterns develop differently from what they would have done were there no manipulation. But patterns still develop.
The heavily manipulated gold market of the past few years still develops and displays well-known patterns such as channels and triangles and megaphones, on small and large scales. Without manipulation, the patterns would have been very different, but there are patterns -- and they can be used to help us find answers to "When?" and "How far?"
Long term spot silver charts have some answers. Parallel lines genrazated from patterns indicate where the price could find significant resistance.
The monthly chart of the silver price below, does not show the very high price spike in 1980, when the Hunt brothers took on the global silver market. That spike went to over $39 on the monthly close, before the Hunts were finally squeezed for margin and had to capitulate.
This reduced scale chart shows two sets of parallel lines. In both cases a single line was generated as the master line. Lines marked M and M1, and the other lines of the set were drawn as parallels to these master lines. The values next to the lines are what the lines will be at the end of March.
The silver price is already over $7.00. Presuming that the price will not fall back to the end of February level to return below resistance - now becoming support - at $6.70 or $6.62, we should experience a significant break higher at the end of March. That should open up prospects for a fairly rapid move up to $8.65, say by the end of May.
After that there is resistance at $10.72 and at $13.15, both at month- end values.
Of course this is the top side of this analysis, because the parallels to lines M and M1 can be extended to the top of the 1980 spike. That would deliver two much higher values for the tops of the respective channels. For M1, defining the steep bear channel, the top of the channel system lies at $31/oz. For the set defined by line M, which has a slight rising trend, the top of the shallow bull channel lies at $41.
It would therefore appear that the silver price has a very good chance to increase to about $13/oz, at least, even though this might take quite a long time. This analysis focuses on price levels, not the time frame to reach them.
Beyond that, there is some indication that the price could reach as high as $30-40/oz and still remain in long- term channel patterns.
A bear squeeze price jump may be indicated on a break of a key acceleration level. Have a look at the daily silver chart below.
The master line is indicated as line M, with line P parallel to M. The gradient of channel A-B is derived from the gradient of line M, in terms of the principles of Chart Symmetry. This channel has held steady to contain the rising trend in silver since the low at $4.83 early in October last year. In principle, the price can reach any price level as long as it remains within this channel - without a price squeeze. That would be a scenario of merely an extension of a trend that has been constant for the past 6 months.
Evidence of a developing bear squeeze has to be in the form a break higher from channel A-B, to reveal an acceleration in the rate of increase in the price. Line A has a value equal to $7.47 for Monday, 15th
March, and it increases in value at close to 2 cents/day, or 10 cents per week.
In other words, the price of silver has to exceed $7.57 on March 22nd and exceed $7.67 on March 29th to signal the commencement of a bear squeeze. Anything below these levels and other intermediate values that can be calculated pro rata, would merely be the result of the ruling trend in channel A-B.
It should be noted that the analysis also provides for key support levels if the ruling trend is to remain intact. Line B has a value of $6.60 on Monday, 15th March. It increases at 2 cents/day or 10 cents/week, which implies the price of silver should not fall below $6.70 by March 22nd or below $6.80 by March 29th, and so on. If this should happen, the channel will be penetrated to the lower side and silver would either turn bearish or extend the bull trend at a shallower gradient that that of channel A-B.
This essay provides some values on which to base decisions related to the When? and How far? of what seems to be a probable coming bear squeeze in silver. The answer to the When? question is answered by using a well-defined and quite accurate 6 month bull channel. This is a chart formation that has developed and is holding intact so far, despite the intervention.
So far, silver is leading the way. Of course, Gold could explode first, dragging silver along and triggering the bear squeeze, but for now, the play is to buy silver.
15 March 2004
© March 2004 Daan Joubert
All rights reserved to author, www.GOLDSignals.com and www.HugoCapital.com
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