Today In Silver

The media is reporting that the BP oil spill in the Gulf of Mexico may turn into one of the worst man-made ecological disasters with thousands of miles of Gulf shore being threatened by potentially tens or even hundreds of millions of gallons of leaking oil. In a worst case scenario, the Gulf spill will make Exxon Valdez look like a stage adaptation of “There Will Be Blood” by kindergardners. On the other hand, the leak might be sealed off in a few days by some miraculous and desperate application of modern technology or it might even shut down by itself.

Either way, several things are certain. One, BP and the rest of the oil industry are not going to live this down for a long time especially if the allegations prove true that no contingency plans had been made to deal with oil spills at BP deepwater rigs (and if that is the case for BP rigs we can pretty much assume it is the industry standard). There are also reports that BP may have decided not to install, due to cost saving considerations, a five hundred thousand dollar remote shutoff valve that might have stopped the leak before it got this bad. If true, I bet nobody would have thought that Goldman Sachs could be dethroned so quickly from being the world’s most hated corporation!

Two, offshore oil drilling in the United States is effectively dead on arrival ironically just one month after President Obama disappointed some of his supporters by including “responsible” offshore oil and gas exploration as a necessary component of America’s future energy policy. It seems the definition of responsible has just made a quantum leap in the direction of  impossible while the mantra of “Drill, baby, drill!” has been discredited as the shortsighted bit of careless idiocy that it has always been. Not because offshore oil exploration itself is a bad idea but because the very soul of the drill-now-and-drill-everywhere crowd is infected by a callous, reckless, cavalier and yes, even maverick, disregard for sound science and business practices. Lest you mistake us for some tree-hugging-Earth-hippie hypocrite, we’d also like to point out that any American who is dead set against offshore oil exploration yet consumes a single drop of oil either directly or indirectly is an A-hole of the first order, the reason being simply that we Americans consume plenty of oil produced off the shores of other countries. Worse than people who don’t care about polluting their own shores are people who are willing to pollute somebody else’s shores in the pursuit of selfish liberty and happiness.

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silverax Crazy Market Thoughts

We have followed the work of the “Optimist” for quite some time especially the unique way that he looks at gold and silver. In his latest update, the Optimist makes the point that measured in terms of value instead of price gold and silver reached new highs last week (all time record high for gold, bull market high for silver). Here it is according to the Optimist:

The value of silver and the value of gold reached new all time highs this week.  The Gold & Silver tab at the top of the page discusses the concepts of value (which is independent of currency) instead of price (which depends on the currency unit the price is measured in).  A typical price chart shows a combination of changes in the value of the silver or gold and the changes in price that are caused by the currency that the chart is priced in.  The change in value is what would result if one buys (long) silver or gold futures in US$ and simultaneously buys (long) an equivalent amount of the USDX US$ exchange rate futures.  Then the USDX long futures will cancel out the silver or gold price changes that result from currency variations, and the combination will leave only the changes in real value which is independent of any specific currency.  (Note that I have not actually done that futures spread trade, and I do not recommend it to anyone else.) The current charts of the value of silver and gold are copied below.  I update those charts each week at the links below:

MoreAG charts the value of Silver

MoreAU charts the value of Gold

Now for some thoughts on the above.

First, these Optimist “MoreAG” and “MoreAU” charts are great for getting a very good overview of the bull market in gold and silver in terms of solely their “real” price increases instead of the price increases that have occurred directly as a result of the bear market in the U.S. dollar. Kitco among others have attempted to do something similar. The approach utilized by the Optimist is simpler yet more aesthetic and more useful at the same time.

Second, these charts are probably as close as we are going to get to an international “standard” that allows investors across the globe to speak the same “language” in terms of gold and silver prices. Some of our subscribers have complained that we, like many others, have a U.S-centric focus on the gold and silver markets especially when discussing price action. Although we feel such focus is entirely reasonable given that the vast majority of global precious metal trading is still done in U.S. dollars, the criticism at its heart is valid because most individual investors don’t engage in “global precious metal trading” — they buy and sell precious metals in their own countries of residence where pricing is in the local currency. To them, the gold or silver price in U.S. dollars is at best an interesting abstraction that has no relevance to their own investment position. Therefore going forward we will be much more broad-based in our gold and silver market analysis and we hope to utilize charts such as those provided by the Optimist.

Third, we should be careful not to take technical analysis too far given that charts such as “MoreAG” and “MoreAU” are not widely followed by traders. Technical analysis works for the most part as either a reflection of trading psychology or a self-fulfilling prophecy. Esoteric yet useful charts like those created by the Optimist may have great value in providing a technical overview of a market but applying indicators, patterns and other technical factors to these charts would be quite useless. That said, we wouldn’t consider the trend lines and channels drawn by the Optimist on these charts to be technical factors but rather part and parcel of a “technical overview”. For example, one might generally discern from the MoreAU chart above that following a big rise in the “value” of gold, a new uptrend appears to be established and this uptrend is not only shifted upwards from the previous uptrend but it also appears to have a steeper slope.

There are certainly more than three useful observations to be made on these charts but let’s stop here for the sake of brevity and relevance. We’ll follow up on these charts periodically and in the meantime let’s see what some of our readers have to say.

silverax AG Wisdom Links

This commentary is a SILVERAXIS exclusive.

A certain doctor by the name of Jeffrey Lewis who discloses that his “site was created by someone with no professional background in investing” tells us that silver was also confiscated by FDR in 1934 (the gold confiscation actually occurred in 1933, the 1934 Acts made gold contracts unenforceable and devalued the U.S. dollar from $20 to $35 per ounce):

The history of confiscation of precious metals is well documented, with literally tons of gold and silver ripped from the hands of ordinary Americans during the financially tumultuous years of the Great Depression.  However, history books and academic research rarely shine light into the confiscation of silver and rather focus on gold, even though both were made illegal for a total of 40 years.

In this article, we’ll examine the history of confiscation and shed light on the possible future confiscation of silver from investors.

Once Upon 1934

Franklin D. Roosevelt penned the first law to seize precious metal assets from Americans as a way to force savings in banks, rather than allowing Americans to hold their wealth in metals.  Prior to the legislation, banks were riddled with liquidity problems, as trust in the American banking system waned and investors looked for the safest place to store their wealth.  With both the banking system in question and the stock market still volatile after its peak in 1929, investors wanted hard assets, namely gold and silver.

FDR hoped confiscation would push investors towards the banking system, as well as raise cash for a growing Federal budget.  Unfortunately, it did just that – all the while ripping wealth right out of the hands of the American people.

The Confiscation of Silver

Silver bullion was also made illegal to own during the 40 year ban.  However, this is often little discussed, as silver coins were still a large part of the money supply up until 1964.  Almost all pre-1964 coinage was 90% silver, and the coins were not illegal to own during this time, as it was a mainstay of the monetary economy.  Silver bars, on the other hand, were illegal, as they represented wealth outside the monetary system and were systematically “purchased” from their owners at a price well below market value.

This of course is utter BS. Silver was never confiscated by FDR. I don’t think silver has a checkered past of being confiscated by other governments either. You can read a good overview of what “confiscation fears” can do to your bullion accumulation plans here. You can also see this excellent summary of the Hunt silver episode for more information on the silver market in the 1970s. How could the Hunts have acquired 55 million ounces of silver in 1973 if it was illegal to own silver bullion?

I’m not endorsing any particular bullion dealer over another here, I am endorsing the truth.

silverax AG Wisdom Links

This commentary is a SILVERAXIS exclusive.

Elliott Waver Alistair Gilbert has taken a shot at predicting the zigs and zags of silver over the next year with his Market Timing Report - Silver:

This a brief follow up to my Report of 13th January advising a SELL of Silver at $18.52. Silver has since been sold down to $14.62 in Wave 3 of 1 of C of Major Wave 2.

In Wave 4 of 1 we can expect to see typically a retracement of Wave 3 of between 38.2% to 50%. This would give us a target of $16.25 for the 38.2% and $16.75 for a 50% retracement. Obviously the wave 4 retracement can halt anywhere between those two targets and given the pressure to the downside in wave 5 may even fall a bit short.

This is somewhat consistent with my thinking insofar as we should get a relief rally in silver back toward the $16.75 area.

Moving on to the big picture, my weekly DT chart shows how Major Wave 1 topped in March 2008 and we moved down for an “A” wave into October 2008 and up for a “B” wave into December 2009. We are now heading down in the “C” wave which should last until January 2011, and this would complete Major Wave 2. The 3 waves of (C) illustrated are 3 of 1 of (C).

This is the part that most “Wavers” seem so intent to be warning us about, that gold and silver will decline into late this year or early next in a “C” wave of a Major Wave 2 or 3 or 4. I don’t know if these wave counts are being derived purely from an unjaundiced technical look at the charts or as an adjunct to the general sense by the Elliott Waving universe that the world is about to accelerate its depressionary downward spiral. In any case, it is certainly something to be aware of, but unless someone can convincingly show me that Elliott Waves predicted silver would drop to $8 in the fall of 2008, I’m not going to be giving much shrift to this kind of preconceived market “analysis”. Not to toot my own horn, but to my knowledge I was the only one to have publicly predicted a massive drop in a metal (okay, it was copper not gold or silver), developed a strategy to take advantage of it, and ate his/her own medicine (along with a fortunate few SILVERAXIS readers).

silverax AG Wisdom Links

NOTE: Published at Metal Augmentor on February 11, 2010 at 2:21PM EST.

This morning both gold and silver are showing some spunk even in the face of a strong U.S. dollar trading over 80 on the USD Index. While the monetary metals are hardly out of the woods yet, the price action is encouraging as it appears conducive to the formation of a bottom (higher highs and higher lows all this week). In particular, gold was able to easily pierce this morning the 1080 level that previously served as support (but over the past few days it has been resistance). It appears we could have one last pullback in the next several days, perhaps to the 1065-1070 level in gold and back to 15.25 or so in silver. If these levels hold, we could then see a relief rally that takes the monetary metals toward a retracement of their recent losses with initial targets in gold of 1137.50 and silver of 16.75, possibly accompanied by a drop in the U.S. dollar back into the 78.80 area.

From a price point as well as our own positioning in the silver market, we are effectively no longer short-term neutral and therefore we should really be turning our “alert flag” (which is a legacy device from the old SILVERAXIS days to gauge our own sentiment toward the silver market) from YELLOW back to GREEN. All other time horizons remain GREEN as well for now. For perspective, we came close to turning this “alert flag” to RED on October 27, 2009 [link only works for Metal Augmentor subscribers] after having turned to YELLOW all the way back on May 29, 2009 [link only works for Metal Augmentor subscribers].  While we did get a vigorous pullback in the monetary metals from May into early July, we pretty much blew it in late August and early September and failed to recognize the unfolding of the powerful speculative fervor that would eventually take gold over 1200 and silver to nearly 20. On a positive note, however, we are hopeful that very shortly Metal Augmentor will have the benefit of an institutional level technician and market analyst who not only called the record-breaking run in gold last fall but also picked the fall 2008 bottom in gold almost to the dollar. We believe integrating this gentleman’s analysis in our trading and speculating will have us on the right side of the market much more often going forward.

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silverax Windbag Wisdom