Silver Price Analysis - 10 Year Cycle - Part 2

(This post contains charts originally hosted at:

http://silverprice.org/silver-price-history.html

http://goldprice.org/gold-price-history.html and

http://goldprice.org/gold-silver-ratio.html)

When I started investing in precious metals, I religiously tracked the price on these websites:

http://www.goldprice.org/gold-price.html

http://silverprice.org/silver-price-per-ounce.html

While both had good, real time updates on metal prices, I've since taken to use these websites to track the price because of some of the enhanced analysis tools they have:

http://www.24hgold.com/english/gold_price_in_canadian_dollars.aspx and

http://www.netdania.com/Products/live-streaming-currency-exchange-rates/real-time-forex-charts/FinanceChart.aspx?m=c

Some charts on goldprice.org and silverprice.org that I will focus on today are the historic gold, silver, and gold:silver ratio charts, specifically the 10 year chart.

As discussed in Part 1, silver has followed a blatantly obvious cycle of run-ups, corrections, and consolidations over the past 10 years.

Gold, on the other hand has, relatively speaking, just gone up.

The gold:silver ratio, on the first glance seems to be an indistinguishable, schizophrenic mess.

When you line the charts up though, an interesting pattern emerges.  Quite simply, every time silver hits a blow off top, the gold:silver ratio hits a new bottom.  Taking this into consideration, it should be pretty evident that an additional criteria (to those discussed in Part 1) for determining when to sell silver is when the gold:silver ratio hits a new bottom.

Given that the last bottom in the GSR was around 31.4 on 28 April 2011, it stands to reason that a very good opportunity to sell would be when the GSR is below that level.

In later posts, I'll discuss the prospects of how this phenomenon factor into a strategy to buy both gold and silver.

Pay Day Price Analysis - 29 Nov 2011

In the big scheme of things, silver is still below it's 300 day moving average, even being up $0.88 today (1 day after these charts). I think at present, below $33.85 silver is a great price. With current events, especially bailing out Europe, mid to low 20's seems unlikely - but who knows what could happen. If war breaks out in the middle east, I think a LOT of money will come running into the US dollar, possibly forcing silver down.


(LATE EDIT - One big thing I noticed that I forgot to menton is the formation of a death cross between the 80 and 200 day moving average.  That's a pretty significant occurance, that I think could signal a correction... we'll have to watch that one.)



Silver is below the 80 day, 200 day, and 300 day moving averages.  1 paycheck contribution towards stacking.

Gold is below the 80 day, but still above the 200 and 300 day moving average.  I'm still going to wait until gold is below the 200 day moving average.

Gold to Silver Ratio: 53.45
Gold to DJIA: 6.44
Silver P200: 0.87

Silver Price Analysis - 10 Year Cycle - Part 1

(This post contains charts captured from http://netdania.com/Products/live-streaming-currency-exchange-rates/real-time-forex-charts/FinanceChart.aspx?m=c)

I'll preempt this post by saying that just because I believe there is a time to "sell" silver, does NOT mean I am not very bullish on silver's mid to long term prospects.  I also do not believe selling silver with the intent to book profits in fiat currency is a good idea.  If I am selling any silver, I am doing it to buy other things to either reduce my debt load, generate cashflow, or hedge against inflation.  I again reiterate the words of Robert Kiyosaki: "cash is trash."

Looking back at the past 10 years it appears that silver's price has a fairly regular cycle whereby it goes through a consolidation period, has a dramatic price increase hitting a blow off top, then a much faster, more dramatic price decrease, then a repetition of the cycle.

Many will make the claim that this is as a result of price manipulation.  I won't.  It may well be the case, but if it is, I think it is irrelevant for the following analysis.

I will reiterate a claim I’ve heard before and one that is very true:  Past performance does not guarantee future performance.  This cycle may be a fluke, it may be by design, it may repeat several more times.  I don’t know.  I’m not omniscient.

Knowing the fundamentals of silver through my own research, I will say it seems very probable this cycle may well continue to play out – but again, there is no guarantee that such is the case.

Let’s start by looking at the weekly 10 year chart for silver, along with the 11, 29 and 43 week simple moving averages, complements of the currency charts available at http://netdania.com/Products/live-streaming-currency-exchange-rates/real-time-forex-charts/FinanceChart.aspx?m=c.  

I chose the 11, 29 and 43 week moving averages because they are the closest to the 80, 200 and 300 simple daily moving average and I will write extensively about these in future posts.  I know that's not a truly scientific methodology to use but for getting a rough idea of how silver's price tracks it's long term trends, I'm going to go off the assumption the 29 weekly moving average is equivalent to the 200 day moving average and likewise the 43 week to 300 day, and 11 week to 80 day.

In my opinion, as this cycle played out over the past 10 years, the opportune time to sell was on the peak of the new top, right before a significant correction.  Again, I’m not omniscient, and if I could have gone back in time to 4 April 2004, 7 May 2006, 9 March 2008 and 27 April 2011 – I wouldn’t have known (and didn’t) that there would be a significant price correction in the coming days.

However, these key dates and their 200 day moving averages did set precedents for future price runs that, if followed, would have been big indicators that a top was near and it would have been a good time to take some profit with some physical position from my investment position.

From these precedents, I have set up several analyses for how I grow my investment position of physical silver. 

The first analysis is to determine what indicators of a probable top are.  To determine this, I divided the spot price by the 200 day moving average on a daily chart (29 and 43 weekly moving average on a weekly chart) to determine the spot price to 200 day moving average or what I call the P200 ratio.

For each of the 4 blow off tops, there ratio was:

4 April 2004 –> 1.53

7 May 2006 -> 1.52

9 March 2008 -> 1.37

27 April 2011 -> 1.77

With the average coming in at approximately 1.55.

It is interesting to note that when there were intermediate tops, until the 2010-2011 run up, the P200 was consistently lower than the average during the tops of the previous 10 years.

Therefore some criteria which may determine what a probable top in silver are:

1. When the price is at a new 10 year high,
2. When the price has gone straight up without a significant correction
3. When the P200 ratio is over 1.4

Applying these criteria, I believe a sound strategy to profitably employ these criteria to pick a probable top are when the silver price reaches a new high, to calculate the P200 ratio and have predetermined points at which take some profit.

The 2010-2011 run-up in silver price (which I believe is a direct result of the Federal Reserves policy of quantitative easing dating as far back as the 2008 global financial crisis) set an astonishing precedent, with the P200 ratio being at a new all time high of 1.77.

This said, I believe it is sound idea, from the investment position, to set aside an amount with which to take profit from and when the P200 hits a certain level, to sell a portion of that amount.

For example, when the P200 ratio hits 1.4, 1.5, 1.6, 1.7 and 1.8 without a significant correction (as in, straight up) – sell one fifth of the allocation of investment silver.  I believe this is the best strategy to employ to

1. Book some profit before a rapid price correction occurs
2. Not cash out too early and not take out some profit if there is a spectacular increase in price
3. Not get faked out by intermediate peak prices
4. In the event of a minor to large correction, take advantage of the lower price to stack some more using profits from silver sold at a higher price

I admit this is an untested method and again I reiterate that past precedents are not a guarantee of future performance.  However, each time in the past 10 years when this cycle played itself out if you had followed this rule for trying to call the top you would have at least booked SOME profit, provided you bought at appropriate times – which will be the subject of future next posts.

On a closing note the next time this cycle plays itself out (if it does at all), there is a good chance it may break the 1979 high and tops $50.  If it does, it will be a very, very unprecedented event that could potentially lead to another similar parabolic run to the one that occurred in 1979.   

I am not going to say it WILL, but knowing that it could, I believe is the reason to maintain 2 positions: the investment position to try to game the charts, and the core position in the event of a crazy parabolic run-up.

In my next post, I will take a closer look at the weekly charts plotting this cycle in silver's price.

PM Investing Requirement - Courage

I live in what many around the world would describe as a "Western Democracy." I vehemently disagree with the general understanding of “democracy” that most people I encounter tend to have.  I'd much prefer to live in a Constitutional Democracy or Liberal Democracy - but let's not go there.

For the sake of this argument, let’s focus on the concept that in a democracy, the majority rules.  This democratic concept is so important that it has a very large influence on the collective psyche of all members of the societies that employ this system of governance.

While democracy is commonly attributed as important for the selection of government, the concept of “democracy” also has a lot to do with the overall operation of society – most importantly in commerce.

Most people do not think about it, but when someone goes into a Starbucks and trade a serialized piece of paper with numbers on it for an overpriced coffee, they are exercising their right to vote.  They are voting that those serialized pieces of paper with numbers on them have sufficient value to merit being traded for that coffee. 

It is a vote of confidence in a currency to trade time, talent, and effort for it.  It is this confidence that leads many to believe that CURRENCY is MONEY, which it is not and has never been.  Much has been written about the difference between the two.  I will say some of my personally preferred authors on the subject are Peter Schiff, Michael Maloney, and Robert Kiyosaki (but I digress).

It is unfortunate, but from what I have seen, most people are injuriously ignorant on the subject of money and most specifically, what money is.  I believe the primary driver for this ignorance stems from the fact that most people in my adjacent community firmly and passionately believe in democracy, that is, the rule of the majority.  It is this spineless, cowardly tendency to conform to mob rule that I believe is what leads most people to remain totally ignorant on the concept of money.

In “Western Democracies” fiat currency, for now, is unquestioningly considered by the majority to be money.  Ignorance on the subject of what is REAL money leads the majority to ostracize, alienate, mock, or simply dismiss those who understand what it actually is.

Faced with this difficult social element, this is why I believe courage is an important requirement to be invested in physical precious metals.

First off, there is the reality that holding physical precious metals, especially as a substantial store of portable wealth makes one subject to undesirable problems like inconvenience, price volatility, loss or theft.  It takes substantial courage to live with that burden.  Especially since most currencies alleviate these problems, with institutions and technologies promising to keep one’s “wealth” secure from volatility, loss or theft and make it as convenient as possible to have access to it.

Second off, and I would say is the larger detractor for most people towards investing in physical precious metals, is the fact that doing so places you far, far outside the majority.  If there is one thing that is true of “Western Democracies,” it is that the majority have the tendency to want to be part of the majority, regardless of whether the majority is correct or not.  It is intimidating not to conform to that rule.  It almost makes one feel isolated and alone - but at the end of the day, majority rule does not determine what is right.  It only determines what most people think - and history has clearly shown that at times, the majority can be incorrect.

Again though I reiterate, that is why if you want to invest in physical precious metals, YOU MUST HAVE COURAGE.

Silver Investing Strategy - Core and Investment Positions

(This post reference images hosted at http://www.silverprice.org/silver-price-history.html)

In my opinion, there's 2 phenomenon to anticipate with the spot price of silver and silver specifically based on analysis of historic price moves.

1.  An unbelievably high parabolic price increase
2.  A less unbelievable, near parabolic price increase, followed by an enormous price correction

For these phenomenon, I believe there are 2 radically different strategies to invest in physical silver.

Let's start by looking at the 34 year price chart for silver:

Someday (possibly soon) I believe there will be a near vertical, exponential rise in the price.  Such a move would be similar to the price move in 1979, whereby at the end of 1978, silver's US dollar price was about $6-7 and by the end of 1979, it was rapidly approaching $50 - a prince increase of around 700% in one year.

While there is a plethora of geo-political factors that, in my opinion, could happen to cause such a rise, I won't be so bold as to say any of them will definitively happen right now (although it would NOT surprise me in the slightest if they did).  If such was the case and silver DID see such a spectacular explosion in price, as of 25 Nov 2011 with silver spot price coming in at $31.08, this would mean by Nov/Dec 2012, silver spot price could be in the $200 range.

Many will discount the 1979 price  move as a one off occurrence, a by-product of the Hunt Brother's cornering the silver market.  My personal belief regardless of the circumstances by which that spectacular price rise occurred, if it happened before there's a precedent set for it to happen again.

For this reason, the first strategy for silver investing is to build up a core position of physical silver and hold it until this spectacular price action occurs.  Until one is confident in the ins and outs of buying physical (which I will write about in future posts), one should build up their core position by dollar cost averaging a small, affordable amount on regular intervals, and just keep buying regardless of the price.

This core position, I believe should be held in anticipation that an parabolic price increase occurs.  When it does, I believe the precedent created in 1979 will be beneficial to determine at what point to trade physical silver for some other tangible asset (absolutely NOT fiat currency or other paper assets that are nothing more than promissory notes). 

The analysis to determine this is simple.  Simple determine the price at which silver started going exponential in a near straight, vertical line.  If the current market price is close to or over 700% it is probably a good time to sell if not all, then a large portion of the core position.

There are other indicators to be watching for as well which may signal whether it is a good (or even wise) opportunities to sell, such as the gold:silver ratio, the gold:DOW ratio, or the gold:housing price ratio.  Perhaps the most important indicator is the prospect of a currency collapse through a hyperinflationary depression, which I believe is a very distinct but real possibility (in which case, I do not believe it would be wise to sell silver at all).

This leads to the next the second phenomenon to anticipate with the spot price of silver – the stomach churning, short term cycle of dramatic highs with more dramatic corrections.

If you look at the 10 year silver price chart, you can see a blatantly obvious trend and cycle.  The trend is that silver’s price is going up (what some would say is very bullish). 

The cycle is that silver’s price has spectacular blow off tops followed by even more spectacular price corrections, followed by a somewhat horizontal consolidation period, followed by another spectacular blow off top.

I do not know that either this trend or this cycle will continue, but delving into some of the fundamentals (which I will write about at a later time), I have strong reason to believe they will.

Going by that assumption, that both the bullish trend and spectacular high-low cycle will continue, I believe using the precedents of the past 4 iterations of this cycle over the past 10 years (which I will write about extensively in future posts) and using a few simple trends, it is possible to determine excellent buying and selling opportunities to profit off the volatility in silver’s price

Fort this reason, the second strategy for investing in silver is using precedents established by the cyclical nature of silver’s price to determine highs and lows at which points to selectively sell and buy.  I call this the "investment position", as opposed to the "core position" described above.  The investment position you plan to sell in the short term.  The core position you plan to keep in case it's the end of the world.

I do not believe in employing the "investment position" strategy it is prudent to necessarily sell with the intent of buying back when the price is lower.  Instead I believe this strategy should be employed to sell with the intent of procuring other tangible assets that either provide cash flow or are also sound inflation hedges.

Factoring capital gains taxes and the volatility of silver's price, It will do no good to sell silver at a high and hope that IF the price goes down low enough for you to be able to buy back at that lower price. For this reason, substantial planning must be done in advance of selling opportunities in order to capitalize on the short term tops in silver's price to move into other assets for wealth preservation and a hedge on inflation.  As Robert Kiyosaki puts it "cash is trash," and I absolutely do NOT want to be left holding a substantial portion of cash for a prolonged period of time - especially if there is runaway or hyperinflation.

Given the possibility of an exponential increase in price akin to the 1979 price increase, I think a combination of both building a core and investment position in physical silver is a prudent strategy.  I don’t want to end up in a position where there is such a spectacular run-up in price and NOT have any physical metal to trade out.  Likewise, being a newbie to the metal market, having bought at a peak, then witnessed the price crash 30% almost overnight, I don’t enjoy the feeling of knowing I both missed out on a great buying opportunity and bought on a top (who does?).

PM Investing Requirement - Iron Stomach

On the surface, investing in physical precious metals is very easy:
You buy them when they are cheap.  You sell them when they are high.  Nothing to it, right?  Wrong.


Unlike many conventional investments, gold and silver have absolutely INSANE volatility.  It is for this reason, if you want to invest in precious metals, you NEED an iron stomach.  What can seem like a cheap price might actually be a high price, and vice versa.  


This volatility, I believe is one of the reason many pundits decry physical precious metals as a speculative investment, unsuitable for the masses.  


Are precious metals a bad investment?  Let's see.


If you look at one of the best performing NADAQ stocks of the past 10 year chart (Apple, NASDAQ:AAPL), you can see that in a 10 year period from Nov 2001 to Nov 2011, it yielded a 3500% return, rarely testing it's long term trendlines (300, 200, and 80 day moving averages).  If you purchased shares of Apple in a dollar cost average fashion from 2001 onward, you would have yielded a very handsome return, and even with the market crash in 2008, today you would have been in in very good shape.


http://www.google.com//finance?chdnp=0&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1322261093388&chddm=993531&chls=IntervalBasedLine&q=NASDAQ:AAPL&ntsp=0

Silver, on the other hand, if you dollar cost average during the same time frame, while you still would have been in good shape -  you would have had to endure several massive run-ups and crashes in spot price, as well as an actual shortage and a near inability to take physical possession during the big 2008 market crash.

The return on silver itself over those same 10 years, while an impressive 670% still wasn't quite as hot as shares in Apple, significantly outperformed the Dow Jones Industrial Average (13%), NASDAQ (28%), S&P500 (28%), and TSX (54%), meaning over the past 10 years, silver significantly outperformed the majority of all North American stocks.

http://www.24hgold.com/english/interactive_chart.aspx?codecom=SILVER&chgecom=ChgeDollarCan&valecom=valedollarcan

http://www.google.com/finance?q=INDEXNASDAQ%3A.IXIC
http://www.google.com/finance?q=INDEXNASDAQ%3A.IXIC
http://www.google.com/finance?q=TSE:OSPTX
http://www.google.com/finance?q=TSE:INDEXSP:.INX
http://www.google.com/finance?q=TSE:.DJI

Yes - silver does not pay a dividend, but not many stocks in a fairly consistent 1-2 year cycle have yielded a trough to peak return of 150-170%.  


I remember investing in RRSP's my "financial advisor" telling me:

 The "Rule of 72" says that you take the interest rate (assuming that it's compounded annually) and divide 72 by it and that's how long it would take for you to double your "money."

With good mutual funds I invested in returning 9-10%, I was looking at 8 years to double my "money."  Conversely, if I had instead invested in silver AT THE RIGHT TIME, I could have doubled my "money" in less than 2 years.  True, there are really good traders who can double their money in a few minutes - but I'm not a very good trader - I'm a full time "professional" working a 9-5 job on salary.

That being the case, through my brief journey of investing in physical metals (both gold and silver), I have proven that I was not good enough to buy silver AT THE RIGHT TIME.  In fact, I both bought and sold a lot of silver and gold at WRONG times.  I will caution that while over a 1-2 year cycle, silver (and to a lesser extent, gold) sees spectacular price  increases, it as the same time has a penchant for daily to weekly 20-30% price corrections, the likes of which I have found (and I believe is deliberately orchestrated) to terrify investors with weaker stomachs.

It is for this reason that investing in physical precious metals you absolutely NEED an iron stomach.  In April 2011, I saw one of those massive price corrections, and seeing silver I bought for $49 go to $33, if I had a weaker stomach, I would have sold all my silver the day after and never looked back.

Starting to Invest in Physical Precious Metals

I started investing in precious metals with my first purchase of 14, 1 ounce silver maple leaf coins on 9-Nov-2010 (about a month before my daughter was born).  I bought them from the Scotiabank a block away from my office and paid CAD$35.88/ounce.  Spot price that day closed at CAD$28.73, and several weeks (and overpriced purchases) later, I realized there were local coin shops that offered significantly better pricing on gold and silver bullion and have never since gone back to Scotia to buy any metal.

The main  objective of this blog will be to share lessons learnt and my personal analysis on investing in precious metals.  Relatively speaking, I am a newbie in the PM investing community, however, I've made all the newbie mistakes and it is my hope to share them with others such that other prospective investors don't have to endure the pain I have.

It is my opinion that physical precious metals, specifically gold and silver, represent not only the best, essential, necessary inflation hedge, but also as of November 2011, the best investment opportunity in a lifetime.

I will not talk about paper silver market and big-fish conspiracy theories of market manipulation by big banks and governments and stick to what I know - in your hand, physical metal.