Catch a falling silver knife - Notes on EJ's April 29 silver sell call

[thriftyandboringinohio]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

....it appears that a higher gold price suits the Feds should the gold window need to be reopened to halt a run on the dollar.

That may be the heart of the matter, and the single best reason to hang on to that physical gold.

[grapejelly]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

silver was and is NOT a bubble. It is simply a commodity (with some monetary characteristic) that has "gone parabolic" as many commodities do occasionally...and this is a temporary phenomenon. I don't believe silver is toast for all that long...this is NOTHING like a bubble (yet).

[EJ]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

silver was and is NOT a bubble. It is simply a commodity (with some monetary characteristic) that has "gone parabolic" as many commodities do occasionally...and this is a temporary phenomenon. I don't believe silver is toast for all that long...this is NOTHING like a bubble (yet).

I'm using the term "bubble" as the mainstream media does to mean a market driven by price and euphoria, having given up on my more refined definition ever gaining currency. To me a true asset bubble requires government to get it going and keep it going, as in the case of the telecom and housing bubbles. Governments hate commodity bubbles and don't tolerate them for long, killing them off early with margin requirement hikes. Before the FIRE Economy era that used to also be true of property bubbles. So perhaps mini-bubble is a better term. Below is an explanation and chart that divides the silver market into five camps as discussed here.

What I'm looking for is that moment in a decade or so when we're at a turning point; anxiety among all market participants peaks, and the market divides into two camps: those who fear losing out on additional gains and those who fear losses in a crash. There are always insiders in a bubble that know when to cut and run. After the initial crash, the market becomes more complicated again as market participants differentiate from two into several camps and the weightings change. We'll see that in the silver market this coming week.

The figment of a $34 fair value for silver complicates the picture for now. Maybe once enough buyers are sucked in to bring prices back up to, say, $40, the rug will get pulled out from under the believers and the chartists who are tracking the popular chart. That's one possible game to be played this week, meaning that a rise from $35 to $39 may be another trading opportunity like $33 to $36. Alternatively the market simply keeps falling.

To help me understand what to look for, I've created the following chart. We go at this armed with our understanding of the dynamics of debt deflation, Peak Cheap Oil, and the ongoing decommissioning of the US dollar as these relate to eras of boom and bust driven by these processes and events as they are reflected in the silver price.

The chart shows five different interpretations of a silver "fair price" tomorrow. The dreamers who believed in $50 gold and beyond, legion only ten days ago, are all but gone. The straight up red line, while absurd on the face of it, was their projection of silver prices until recently.

One the other end of the spectrum are the pessimists who never owned any silver and never will at any price. They are extrapolating the silver price rate of rise from 2003 when silver stopped bumping around $5 as it had for two years after I bought it and started a steady albeit modest rise, and nearly coincides with the early stages of the dollar's decade long decline. The trend ends in 2006 with the bursting of the housing bubble. If you think silver is an industrial metal, the demand for which will decline once the post recession reflation money runs out, and that the dollar will stage a recovery as a result rather than tanking further in response to rising sovereign default risk, you are a silver pessimist and $14 is your number.

Next up the ladder are the realists who believe that silver is an industrial metal but that despite unfavorable economic conditions and only modest demand, more dollars will be needed to buy it as the US economy weakens. They think $21 is a fair extrapolation of the rate of price increases since the dollar started to weaken with the beginning of the end of the FIRE economy in 2001, plus the wars, plus Peak Cheap Oil, net of financial crisis and reflation.

Next are the optimists who think the rate of price growth since the reflation began in March 2009 is the "new normal" growth rate. This includes nearly everyone in the stock market as well, who thinks they've been promised QE3 and whatever else is necessary to keep asset prices rising. To them $25 seems quite fair and puts the gold/silver ratio back to its gold/silver ratio of 60 since governments stopped buying silver.

Finally comes the consensus as published in the mainstream press. Barron's and Marketwatch and so on called silver fund managers over the weekend to ask them what they think and, lo! They think the price silver closed at on Friday is just about right. It's also, not coincidentally, the price that most silver chartists have been using to identify the transition from "buy" to "hold." I have no idea where they get this $34 price from. It doesn't correlate to anything that has occurred on a macro level, but there it is, set in pixels like that fake image of Obama smoking a cigarette that everyone has seen and most people believe.

The way I see it, market participants will fight their way among macro-driven price levels, as well as the chartist levels, as the silver falls toward $20 and possibly under before rebounding to over $20.

[BK]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Your chart takes me back to 2000-2001 and a startup that was lucky enough to get acquired by ADCT - but, the stock of the acquiring company was falling like a rock. Many Engineers at the startup could not sell their shares at $30/share because it was too low, and the $23 was too low, at $19-$20 they couldn't sell because the stock was bound to trade back at $23 share and so on and so on. Humans just weren't designed to understand Financial Markets.

[EJ]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Your chart takes me back to 2000-2001 and a startup that was lucky enough to get acquired by ADCT - but, the stock of the acquiring company was falling like a rock. Many Engineers at the startup could not sell their shares at $30/share because it was too low, and the $23 was too low, at $19-$20 they couldn't sell because the stock was bound to trade back at $23 share and so on and so on. Humans just weren't designed to understand Financial Markets.

I was CEO of a wireless networking company from 2001 to 2004. I hired as my VP Marketing a fellow from Nortel. He had most of his money tied up in Nortel stock. It collapsed approximately 80% by the time he'd joined my company. It staged a moderate recovery to only a 70% loss from the peak in early 2004, at which time I took him out for a beer and strongly suggested to him that he'd regret not selling the stock he had left. He was mortified. He was certain that the peak price was in fact the "real" price and that what had happened was sure to be reversed in time once investors came to their senses and bid the stock up to a price that reflects the true greatness that was Nortel. I told him that despite all of the hard work and love he'd put into Nortel, and his loyalty to the company, the stock would be trading in the pink sheets eventually, virtually worthless, because the company was never competitive in the first place, and a collapsing stock price at a certain point creates its own self-fulfilling dynamic of failure, and Nortel had long ago surpassed that point. He could not understand my argument. As far as I know rode the stock all the way down. It's a very, very painful thing to watch a friend put themselves through this.

[jk]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

jesse livermore: Remember that stocks are never too high for you to begin buying or too low to begin selling.

another useful tool is to ask yourself: if i didn't own this asset, would i buy it at today's price? if the answer is no, why are you holding it? [leaving aside spreads, slippage, brokerage fees and possible tax considerations]

[bart]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

Finally comes the consensus as published in the mainstream press. Barron's and Marketwatch and so on called silver fund managers over the weekend to ask them what they think and, lo! They think the price silver closed at on Friday is just about right. It's also, not coincidentally, the price that most silver chartists have been using to identify the transition from "buy" to "hold." I have no idea where they get this $34 price from. It doesn't correlate to anything that has occurred on a macro level, but there it is, set in pixels like that fake image of Obama smoking a cigarette that everyone has seen and most people believe.

Fibonacci ratio is the most likely source in my opinion:

[llanlad2]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

It's not new, but definitely in the last six months or so I think. So kinda new... ;-)

I had some there from May 2010 which was quite soon after they introduced it I think. One thing that may put people off is that it can only be held in a London vault unlike the gold which allows you to choose Zurich for example.

[Jill Nephew]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

I really recommend "Your Money and Your Brain" for those that haven't read it.

The best investment advice/algorithm i have every heard was on KGO (local news) back in 94. It is responsible for almost all my good trade decisions, here it is:

When something catches your attention and you are confronting a sell decision, ask yourself "what is the probability i think it will go up versus down?" and sell that percentage. If i give 50% chance it will go up, i sell half, if i give 20% chance it will go up, i sell 80%, if i give 80% it will go up (but just feeling nervous) i may even sell 20%.

This does two miraculous things:
1. It gets you to do SOMETHING, and breaks the deadlock of needing certainty to take action
2. You can't beat yourself up or reward yourself easily. The glass is always partly full/partly empty. Avoiding the reward/punishment chemicals in the brain helps you to make more rational decisions in the future and not try to 'make up for what was lost' or 'repeat the win' etc.

When a small software company i worked for from 99-2003 (bubble time) was acquired, i watched virtually all my coworkers miss every sell opportunity because they couldn't concieve of a fractional trade and were waiting for a better price.

[c1ue]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

When something catches your attention and you are confronting a sell decision, ask yourself "what is the probability i think it will go up versus down?" and sell that percentage. If i give 50% chance it will go up, i sell half, if i give 20% chance it will go up, i sell 80%, if i give 80% it will go up (but just feeling nervous) i may even sell 20%.

This isn't bad advice, but unfortunately still relies on human assessments of probability.

These are generally exaggerated - what is 50% in reality is pushed to up to 80% or down to 20% by emotion.

[rogermexico]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

That may be the heart of the matter, and the single best reason to hang on to that physical gold.

+1

[rogermexico]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

jesse livermore: Remember that stocks are never too high for you to begin buying or too low to begin selling.

another useful tool is to ask yourself: if i didn't own this asset, would i buy it at today's price? if the answer is no, why are you holding it? [leaving aside spreads, slippage, brokerage fees and possible tax considerations]

The "would I pay this much for it now rule" has been rule number one for me for well over a decade.

The biggest impediment I see for most people in exercising this rule is the bullhorn's insisitence on minimizing taxes.

Yes, if you let your gains evaporate that certainly will minimize your tax hit : )

[aaron]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

It is the move from the high in 2008, to the low after the crash, when broken out past the previous high. In other words, the move from about $21 to $8 was $13... Once we took out $21 the next goal would be plus $13 = $34. ---> At least this was the number I was looking towards, until it was passed by.

I say this as a non-expert, but somebody who has read TA. In other words, I am the sheeple.

[FRED]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

EJ and Jesse comparisons are apples and oranges. EJ is not a short term trader.

He is when he wants to be, such as after a silver bubble collapse.

[bart]

Re: Catch a falling silver knife - Notes on EJ's April 29 silver sell call

He is when he wants to be, such as after a silver bubble collapse.

Indeed and truly, but in general he's not a trader - he did hold that silver for about a decade... and blew returns of folk like Mish virtually totally into the weeds.