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.