6 Signs Silver has hit bottom
This is an excerpt from:
6 Signs That the Silver Price Has Bottomed
Zombie investing and short-term manipulation aside, here are six
signs suggesting that silver has bottomed and is headed higher in the
back half of 2013…
1) The silver price decline is indicative of capitulation selling and panic, which suggests a bottom
It has been nearly as steep as the 2008 decline when the entire global financial economy was at risk of collapse. Yet, we are not in the midst of any type of a (public) financial panic. To the contrary, stocks have been climbing higher and the banking sector is reporting a surge in profits that are handily beating expectations. There really isn’t much to justify the magnitude of the decline that we have seen in silver. As investors tend to overshoot in both directions, this sell off appears to be a knee-jerk emotional reaction without much substance driving the decline.
2) Mining stocks are outperforming and tend to lead the metals
After dropping much faster than silver, we are seeing signs in the past week of quality mining stocks outpacing their underlying metals. While silver is up 4.5% in the past week, many of the silver miners are up 8% or more. Of course, they tend to offer this leverage in both directions, but I like to see a quick swing back to leverage on the upside near a turnaround such as the one we have witnessed in the past week.
3) The silver price is now below the true all-in cost of production for many miners
Estimates vary, but the average number is thought to be around $20 per ounce. How many items can you buy in the marketplace at or below the cost to produce it? Can you buy a gallon of gas at the production cost? Can you buy fruits and vegetables at the cost of farming the items? Can you purchase a new flat screen TV for less than it costs to manufacture? Of course not. This anomaly in the silver market can not last very long. Silver miners will be forced to shut down unprofitable mines, resulting in lower supply in the short term. They will also be forced to slash budgets for exploration and development, which has the potential to lower supply well into the future. Which leads to point #4…
4) The supply and demand fundamentals are increasingly bullish for silver
While supply has been rising marginally, demand has been picking up significantly both from the investment and industrial sides. Investment demand in bullion is at all-time highs in 2013 and has resulted in shortages and high premiums on popular mint coins. Year to date sales for the popular silver eagle coin reached 25,043,500 as of July 1st. This amount is up by 44.0% from the mid year total for last year. More significantly, the year to date sales are up by 12.3% compared to the mid year sales total for 2011, when annual sales had achieved the current record high of 39,868,500. This should only accelerate in the coming months as bargain hunters load up on sub-$20 silver. Industrial demand also appears to be picking up after dropping last year. This is being driven by a recovering global economy and resurgence of demand from the solar industry. And unlike gold, silver gets depleted in industrial applications and ends up scattered in quantities too small to justify salvaging. So while all of the gold that has ever been mined still exists for re-sale, silver stockpiles decline each year and must be replenished with new mining.
5) The FED is not going to significantly reduce their QE program anytime soon
Even the hint of slight tapering in the future crashed the markets and FED officials had to backtrack. Just when there was a building consensus that the FED would begin tapering this year, Bernanke announced that “highly accommodative monetary policy for the foreseeable future is what’s needed.” Imagine if they actually eliminated QE immediately. Ouch! A cursory examination of the FED’s key mandates also suggests that no significant tapering will occur anytime soon. Core inflation remains very low and unemployment remains high, so if anything we are likely to get more FED stimulus and not less. The FED may deliver the easing in a slightly different manner or even give it a different name, but I don’t think they can take away the punch bowl anytime soon. Rates must remain artificially low to keep the debt serviceable and keep the housing market from crashing. And we should really keep all of this tapering talk in perspective, courtesy of Zerohedge.com…
6) The technical chart suggests there is support around $18.50 and silver has bounced off this level in the past week
I take technical analysis with a grain of salt, especially considering the degree of manipulation in this sector. However, this level around $18-$19 was strong resistance on four separate occasions from 2008 to 2010. Resistance often turns into support. The stronger the initial resistance, the stronger the future support. Furthermore, if you look at the long-term trend channel outlined in blue, you can see that silver has remained within this channel for 90% or more of this entire bull market. The only times when it made a significant move outside of the channel was during the financial crisis of 2008 and during the exponential move towards $50, which proved to be a very short-lived spike. Silver is now at levels as severely oversold as it was during the depths of the 2008 crisis, which makes little sense given the current absence of any full-blown crisis. Either the precious metals bull market is really over or silver is due for a bounce back above $30 and into the long-term trend channel charted above. You will have to make that call for yourself, but I personally assign the probability of this bull market being over somewhere between zero and pigs flying.
* * * *
Here are two additional items that readers have suggested for inclusion after this article was published:
7) The debt ceiling clown show is scheduled for September
While it is impossible to predict how it will affect prices, any highlighting of the nation’s debt problems should be bearish for the dollar and bullish for silver. If the ratings agencies dare downgrade US debt again in the face of political posturing and inaction, this should also be very bullish for precious metals.
8) We are in the middle of the summer doldrums for precious metals
This is typically a weak period in the PM markets that is usually followed by higher prices into the Fall and Winter. For a detailed analysis and charts showing the seasonal trends, click here.
Conclusion
Both from a fundamental and technical perspective, silver looks to be oversold at current levels. The metal was due for a correction after the overblown move towards $50 in 2011. But just as it overshot to the upside, I believe it has now overshot to the downside. This is even more apparent with mining stocks, which are more undervalued relative to the metals than at any point during the current bull market. These companies may see more downside as Q2 earnings disappoint, but I believe much of this risk is already baked into current valuations.
I never advocate going ‘all in’ at one juncture, but I believe this is an excellent opportunity to start scaling into new positions or adding to current positions. I like to do this in tranches, buying a set amount of both physical silver and best-in-breed mining or streaming stocks every few months. This ensures that you don’t deplete all of your cash just prior to another move lower, while also allowing you to get ‘skin in the game’ at levels that appear to be near the bottom of this prolonged correction.
Interesting reading. CYA:SE
1) The silver price decline is indicative of capitulation selling and panic, which suggests a bottom
It has been nearly as steep as the 2008 decline when the entire global financial economy was at risk of collapse. Yet, we are not in the midst of any type of a (public) financial panic. To the contrary, stocks have been climbing higher and the banking sector is reporting a surge in profits that are handily beating expectations. There really isn’t much to justify the magnitude of the decline that we have seen in silver. As investors tend to overshoot in both directions, this sell off appears to be a knee-jerk emotional reaction without much substance driving the decline.
2) Mining stocks are outperforming and tend to lead the metals
After dropping much faster than silver, we are seeing signs in the past week of quality mining stocks outpacing their underlying metals. While silver is up 4.5% in the past week, many of the silver miners are up 8% or more. Of course, they tend to offer this leverage in both directions, but I like to see a quick swing back to leverage on the upside near a turnaround such as the one we have witnessed in the past week.
3) The silver price is now below the true all-in cost of production for many miners
Estimates vary, but the average number is thought to be around $20 per ounce. How many items can you buy in the marketplace at or below the cost to produce it? Can you buy a gallon of gas at the production cost? Can you buy fruits and vegetables at the cost of farming the items? Can you purchase a new flat screen TV for less than it costs to manufacture? Of course not. This anomaly in the silver market can not last very long. Silver miners will be forced to shut down unprofitable mines, resulting in lower supply in the short term. They will also be forced to slash budgets for exploration and development, which has the potential to lower supply well into the future. Which leads to point #4…
4) The supply and demand fundamentals are increasingly bullish for silverWhile supply has been rising marginally, demand has been picking up significantly both from the investment and industrial sides. Investment demand in bullion is at all-time highs in 2013 and has resulted in shortages and high premiums on popular mint coins. Year to date sales for the popular silver eagle coin reached 25,043,500 as of July 1st. This amount is up by 44.0% from the mid year total for last year. More significantly, the year to date sales are up by 12.3% compared to the mid year sales total for 2011, when annual sales had achieved the current record high of 39,868,500. This should only accelerate in the coming months as bargain hunters load up on sub-$20 silver. Industrial demand also appears to be picking up after dropping last year. This is being driven by a recovering global economy and resurgence of demand from the solar industry. And unlike gold, silver gets depleted in industrial applications and ends up scattered in quantities too small to justify salvaging. So while all of the gold that has ever been mined still exists for re-sale, silver stockpiles decline each year and must be replenished with new mining.
5) The FED is not going to significantly reduce their QE program anytime soon
Even the hint of slight tapering in the future crashed the markets and FED officials had to backtrack. Just when there was a building consensus that the FED would begin tapering this year, Bernanke announced that “highly accommodative monetary policy for the foreseeable future is what’s needed.” Imagine if they actually eliminated QE immediately. Ouch! A cursory examination of the FED’s key mandates also suggests that no significant tapering will occur anytime soon. Core inflation remains very low and unemployment remains high, so if anything we are likely to get more FED stimulus and not less. The FED may deliver the easing in a slightly different manner or even give it a different name, but I don’t think they can take away the punch bowl anytime soon. Rates must remain artificially low to keep the debt serviceable and keep the housing market from crashing. And we should really keep all of this tapering talk in perspective, courtesy of Zerohedge.com…
6) The technical chart suggests there is support around $18.50 and silver has bounced off this level in the past week
I take technical analysis with a grain of salt, especially considering the degree of manipulation in this sector. However, this level around $18-$19 was strong resistance on four separate occasions from 2008 to 2010. Resistance often turns into support. The stronger the initial resistance, the stronger the future support. Furthermore, if you look at the long-term trend channel outlined in blue, you can see that silver has remained within this channel for 90% or more of this entire bull market. The only times when it made a significant move outside of the channel was during the financial crisis of 2008 and during the exponential move towards $50, which proved to be a very short-lived spike. Silver is now at levels as severely oversold as it was during the depths of the 2008 crisis, which makes little sense given the current absence of any full-blown crisis. Either the precious metals bull market is really over or silver is due for a bounce back above $30 and into the long-term trend channel charted above. You will have to make that call for yourself, but I personally assign the probability of this bull market being over somewhere between zero and pigs flying.
* * * *
Here are two additional items that readers have suggested for inclusion after this article was published:
7) The debt ceiling clown show is scheduled for September
While it is impossible to predict how it will affect prices, any highlighting of the nation’s debt problems should be bearish for the dollar and bullish for silver. If the ratings agencies dare downgrade US debt again in the face of political posturing and inaction, this should also be very bullish for precious metals.
8) We are in the middle of the summer doldrums for precious metals
This is typically a weak period in the PM markets that is usually followed by higher prices into the Fall and Winter. For a detailed analysis and charts showing the seasonal trends, click here.
Conclusion
Both from a fundamental and technical perspective, silver looks to be oversold at current levels. The metal was due for a correction after the overblown move towards $50 in 2011. But just as it overshot to the upside, I believe it has now overshot to the downside. This is even more apparent with mining stocks, which are more undervalued relative to the metals than at any point during the current bull market. These companies may see more downside as Q2 earnings disappoint, but I believe much of this risk is already baked into current valuations.
I never advocate going ‘all in’ at one juncture, but I believe this is an excellent opportunity to start scaling into new positions or adding to current positions. I like to do this in tranches, buying a set amount of both physical silver and best-in-breed mining or streaming stocks every few months. This ensures that you don’t deplete all of your cash just prior to another move lower, while also allowing you to get ‘skin in the game’ at levels that appear to be near the bottom of this prolonged correction.
Interesting reading. CYA:SE
Comments
Post a Comment