Is Silver In A Bull Or Bear Market?

April 16, 2014

Silver has underperformed gold lately. In the first quarter of 2014, both metals have rallied nicely, but, somehow surprisingly, gold did better than silver. It leaves a lot of investors with the question whether silver is in a bull or in a bear market. David Morgan, founder of The Morgan Report, one of the most qualitative precious metals investing newsletters, discusses his view on that question.

He reminds us that, a year ago, he told people that silver was a buy at or below $30 an ounce. The key support level, up until then, was $25 to $26 an ounce. After it broke down, it is acting as a very strong resistance level.

Back then, when silver was trading around $30 an ounce, there was a 10% spread between silver spot price and resistance at $26. That is not a major number in the context of financial markets. The key point was not the spread, but the fact it broke through that support level which had held for several years, making its importance so great.

However, in the big picture of things, Morgan does not consider this as THE most important fact. If silver goes to $100 an ounce, which is line with Morgan’s expectations, it will not make a difference whether you bought at $20 or $30. From that point of view, the grey metal is now in a bear cycle during a secular bull market. After gold and silver have gone up for 12 years in a row, it went lower the 13th year. There is nothing unusual about that, as all markets go up and down.

The rationale behind the continuation of the secular bull market is based on the fundamental and technical picture.

From a fundamental point of view, it is a fact that all fiat currencies eventually go down. The dollar as reserve currency is on that path currently. That is evidenced by major countries like India, Australia or Russia setting trade agreements outside of the dollar. There is a clear trend towards trade settlements in local currencies or gold (say, anything but the dollar). Russia is proving right now their desire to settle energy payments outside the dollar. They are about to close a huge gas contract with China. The petrodollar is the main reason why the dollar is a reserve currency. If that breaks, the dollar’s position will break as well, which is a positive for the metals.

From a technical point of view, basic analysis shows that the major uptrend line is not touched. This implies that both silver (and gold) are still in an uptrend. The key indicator to determine whether silver follows gold in the bull market is the gold:silver ratio. At the start of the bull market in 2001, the ratio was 80 to 1. Today, it hovers around 60 to 1. If silver would be in a bear market, decoupling from gold, the gold:silver ratio would be greater than 80 to 1.

Silver simply does what it is good at, i.e. confusing investors. People must understand that the gold:silver ratio is a very accurate way to see which metal is performing best against the other(s). For investors that started accumulating silver at the beginning of the bull market, when it was trading below $5 an ounce, silver is providing still much more return than gold. As long as the gold:silver ratio remains within its normal bandwidth, there is no worry that silver has left the bull market.

The psychological impact is the biggest challenge for an investor, as usual. On the one hand, $1300 sounds more powerful than $20. On the other hand, the number of early adopters was limited, as in every emerging bull market. As silver became more popular as momentum started to buil on stronger volume, most silver investors started investing between $30 and $48. A lot of those investors have given up in the last 2 years. They could not stand the emotional pressure. Unfortunately for them, this is typical behaviour during a bottoming process.

The following long term chart makes the point clear. Silver, as usual, follows gold’s trend but with some leverage (both to the upside and the downside). The bottom part of the chart shows the gold:silver ratio over the last ten years. The ratio stands somewhere in the middle between its two extremes, i.e. 30 and 90. Chart courtesy: Sharelynx.

In that respect, an extremely interesting chart, not discussed by Morgan but available through Sharelynx (the most comprehensive gold data service), is presented below. It shows the future price of silver based on a gold price and gold:silver ratio. If we apply a conservative gold price projection of $3000 with the current gold:silver ratio of 60:1, the future silver price in such a scenario would be $75. In the extreme scenario where gold would go to $6000 with a gold:silver ratio of 40 (still within the historic bandwidth), the silver price would be $150. This is not to predict those prices, it merely serves as a framework with fair price projections.

On the shorter timeframe, David Morgan expects a stronger than average summer for the metals. The Ukraine situation which results in Russia opting out of the dollar based payment system, will have big repercussions. That will not happen overnight, nor should one expect a massive and sudden market participation. This trend will likely put a floor below gold.

Big money will enter the precious metals complex as soon as a trend is established. They do not try to pick a bottom or top, but rather ride a trend. Silver’s trend is above $21, a price level which was tested twice. For a trend to be established, it should stay above it with big volume. For more conservative investors, it is the $25 or $26 level that is critical. Breaking those levels on big volume will be the confirmation that the bull market is still present. The importance of those levels should not be underestimated, given that “old support becomes new resistance.” Given how (commodity) markets work, one can expect at least 3 attempts before silver will pierce through it.


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