Here is the latest technical analysis on silver with the assistance of Eidetic Research, our institutional-level technician. The lack of posts on Silveraxis during the past few months have been in large part due to being busy at Metal Augmentor (new website design to launch soon) and partly out of deference for giving the silver move some space to play out. We are now coming back because this rally stage of the market may be in the very latter stages. More stuff will be posted soon.
We’ve had some recent discussions with our market technician partner at Eidetic Research in order to help us gauge the current situation in precious metals and other markets with an emphasis on silver given its notable recent behavior. While our own outlook will always remain our own, we are heavily influenced by Eidetic’s technical and market observations. The reason is simple: the analysis is more useful, apt and accurate than any other technical work out there. With the above understanding out of the way, we’ll paraphrase and embellish Eidetic’s views below. Our own supplemental and dissenting thoughts will be presented in separate market updates to follow.
According to Eidetic Research, there is not a huge amount of insight that can be gleaned from near-term gold or silver at the present time that the charts don’t already make rather obvious. Tellingly, a $41 area swing target for silver didn’t contribute much to the recent price action as the moon metal powered through the low 40’s range and is now within striking distance of the January 1980 all-time spot market high of $50-something. Last Monday’s top reversal from around $41.70 could have threatened the trend but a lack of follow through and then an upside reversal into Thursday with a new bull market high on Friday revealed just how strong this market is currently. Unsurprisingly, the price action to end last week has translated into aggressive buying of silver into early this week.
Importantly, the recent exuberant performance by silver has not undermined the market. Indeed, there are presently no specific nearby price levels below which silver would need to drop for there to be lasting technical damage. Overall, silver appears to be in an accelerated third wave of an even larger wave three — what Elliott wave theorists call a “third of a third” (i.e., Wave 3 within larger Wave III of the sequence that began in 2001).
Silver should continue to outperform gold until it no longer does — in other words, there is no nearby ratio of gold to silver that has technical significance. That said, there could always be a bounce in the ratio if silver hits a meaningful downdraft in the short term. Even with the technically overextended conditions, however, silver is telling us in the macro scheme of things that eventually it will narrow its ratio to gold to the 15-17 area (around where the 1980 top was made).
The following is an example of the quality of technical analysis available to subscribers of the Metal Augmentor service. Just before the following technical analysis was published, we speculated on the imminent breakout by silver from its intermediate triangle pattern.
Silver Market Technical Analysis
by Eidetic Research
Note: All charts in this technical analysis can be enlarged to full size by clicking on the chart.
The foundation of our technical approach to analyzing markets rests on three principles: pattern recognition, momentum conditions and wave analysis. Although our initial monthly chart above features wave annotation, we are presenting it more for perspective than wave interpretation. In this analysis we want to concentrate on momentum conditions but we will revisit the above chart in our concluding remarks. For now, our longer term perspective on silver is that the market completed a major down price cycle in November 2001 at a Comex nearby futures low of $4.0150. Since then new up cycle trend development has encountered heavy selling pressure around $20. Prices have backed down, sometimes aggressively from highs around $20 in March and July 2008, December 2009 and May 2010. Our August 21, 2010 silver market analysis discussed the potential for a near-term move up to the $21.20 area given the upside completion of a May-August 2010 triangle pattern (pictured here). The pattern did complete to the upside so we are expecting further gains from a current price at $19.90 as we write.
Our favorite gauge of price momentum conditions is the stochastic(s) oscillator but we also rely, albeit to a much lesser degree, on Wilder’s ADX indicator. For those unfamiliar with the indicator, it may be defined thus:
ADX attempts to measure the trending quality of a market . . . The indicator measures the strength of the trend, regardless of direction; the higher the value, the stronger the trend.
The indicator itself appears as a line that may move between values of 0 and 100 (see indicator on silver chart below). In the past we did a study of the reliability of the indicator (10-period and applied to Comex gold prices) and our conclusion is that as far as its application to weekly charts goes, it is a better gauge of trending power in up markets than it is in down markets. We also adhere to the view of other technical analysts that the indicator needs to be rising and above a threshold of 20 to confirm a sustained trend condition.
Dr. Ron Paul, U.S. Representative from Texas, wants to have an audit of the gold held at Ft. Knox that is under the supposed control of the Federal Reserve. He even plans to introduce legislation next year to force the Fed to conduct an audit:
“If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said of the Federal Reserve.
This is not the first time the congressman has made his pitch. “In the early 1980s when I was on the gold commission, I asked them to recommend to the Congress that they audit the gold reserves – we had 17 members of the commission and 15 voted no to the audit,” said Paul. “I think there was only one decent audit done 50 years ago,” he said.
Paging Dr. Paul! Paging Dr. Paul! The U.S. gold reserves held at Ft. Knox and elsewhere are actually under the control of the U.S. Mint, a bureau of the U.S. Treasury Department, and these gold reserves are ALREADY being audited by the independent accounting firm KPMG. In fact, an annual audit has been ongoing for a number of years, first by inspectors of the U.S. Treasury Department since the 1980s (Treasury inspectors are sworn federal law enforcement personnel) with additional audits by independent accounting firms starting in the 1990s.
When KPMG was appointed independent auditors for the 2005 fiscal year, the accounting firm insisted on a revised audit format that involved a complete audit included accompanying Treasury inspectors on the physical count of bullion in vault facilities at the Ft. Knox and West Point bullion depositories. Prior to this and despite Dr. Paul’s claim that the last audit was conducted in the 1950s, Treasury inspectors had conducted rotating audits of bullion held at the Ft. Knox, West Point and other depositories since the 1980s as part of a comprehensive overhaul of governmental accountability by the Office of the Management and Budget. These audits include test weighing and assays that have periodically revealed minor discrepancies in bullion fineness and weight over the years. Not all the bullion is counted each year, mind you, rather it is done on a rotating basis with Treasury seals being placed on each audited vault. The inspectors check at least on an annual basis that these seals have not been tampered with. According to my reckoning, all vaults should have been initially rotated through a few years ago, which means that the vaults now being inspected are already on their second or third audit pass.
In a recent interview conducted by Jeff Clark of Casey Research and self-declared as The Best Gold Interview of 2010, Andy Schectman of Miles Franklin discusses the future supply situation in the retail bullion market. Unfortunately, most people who have been around the block in the gold market will not find his views to be particularly insightful or surprising so we’d like to spice things up a bit by adding our own contrarian arguments and twisted perspective.
Among Mr. Schectman’s not-very-extraordinary claims is that the apparent shortage of gold and silver bullion and the resulting premiums that arose during the financial crisis in 2008 were caused by extremely strong demand from panicked retail buyers. Mr. Schectman then warns us that we should expect more retail shortages in the future. We can’t really argue with his logic but we believe he is only telling half the story given that many dealers were in fact rationing their existing inventories as a result of low bullion prices. Simply put, the dealers were unwilling to sell the shelves bare at prices so terribly low.
While it is true that bullion dealers are running a business like everybody else, most of them are also gold (and/or silver) bugs and consequently have much of their wealth sunk into their business in the form of bullion inventory. That way when the eventual and inevitable price spike to $5,000 gold and $500 silver comes, they can sell it all and retire as billionaires. This might not be the case for the large corporation-style dealers or the tiny numismatic coin shop mom-ann-pops but there are a lot of dealers between those two extremes. Their inventories are typically not hedged or only slightly so. More to the point, these dealers are expecting the big score along the way and would only sell out at a loss under desperate circumstances.
Over at Metal Augmentor we recently prepared an updated mid-tier silver producer report in PDF format. Here it is: Mid-Tier Silver Producer Report June 2010 PDF.
We reach basically the same conclusion as in our initial reports — Fortuna Silver and First Majestic get top honors although there is a case to be made for Silver Standard and several of the other companies depending on what you are looking for in a silver producer other than fundamental value. I will note that yesterday Fortuna and First Majestic were top performers among the silver producers along with U.S. Silver, which our report identified as having the greatest leverage to higher silver prices. Coincidence? I think not.
Our report is unlike anything else out there since it is comparative and allows silver investors to analyze a number of different fundamental and valuation measures on a head-to-head basis. Even a venerable and respected analysis such as John Doody’s Gold Stock Analyst looks like doodling with crayons compared to our effort. Previously we published a mid-tier gold report that identified New Gold as an undervalued standout. The company’s chart over the past six months tells the story: our approach works.
Soon we are going to be adding several smaller juniors (Great Panther, Excellon, Impact, Aurcana, etc.) as well as some larger companies (Fresnillo, Silver Wheaton) in an updated silver producer report that will be available to Metal Augmentor subscribers. We are also in the process of updating the mid-tier gold producer report as well as preparing a junior gold producer report over the next few weeks. These reports alone are easily worth ten times more than the measly $107 cost of a one year subscription to Metal Augmentor.
The PDF format makes the silver producer report easy to send around, which we encourage. Once again, here is the report: Mid-Tier Silver Producer Report June 2010 PDF.