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

[FRED]

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

Today's update on the performance of gold and silver since the silver sell call April 29, 2011.

[jpetr48]

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

Fred,

Can you please update EJ's gold forecast? I recall he did say it was more difficult to estimate and that he expected prices to remain constant rather than fall as they did.

My question is now centered on a probable 15-20% S&P correction. It looks like gold will be liquidated as well in a market sell off- just wonder if EJ is more confident in forecasting gold now.

[Polish_Silver]

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

Silver in turn is an industrial metal - one whose single largest category of demand has gone into irreversible decline (photography). Other sources of industrial demand would almost certainly be affected by silver price increases.

Silver potography has been small for 10 years. Even befor that, much of photographic silver was recycled. Silver has diverse industrial uses, which cannot be easily substituted for by other materials. Many of the substitutes are more expensive (gold, Pt, etc) or give worse performance. Silver (like every other element) has unique electrical, optical, and chemical properties.

Silver is certainly not the bargain it was in 2000. Silver is not money to central banks. It's long term performance is not great, and neither is gold's. That's what stores of value are! But to survivalists and many others, silver is a store of wealth. Coin shops have huge inventories of silver, hardly any of Pt, Pd, etc. Gold is so precious it is awkward for barter. By all accounts, the silver markets behave like monetary markets that is, large value of paper contracts relative to physical delivery. I can hardly wait for Mexico to monetize silver.

[bart]

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

Silver photography has been small for 10 years. Even before that, much of photographic silver was recycled.
...

For what its worth, I owned a photofinishing plant for decades, and we recovered 86-92% of the theoretically available silver. The 1 hour labs averaged about 10% less in my experience.

[c1ue]

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

Silver potography has been small for 10 years.

That may be true for the United States and the 1st world with regards to consumer photography; it is not true overall. Medical devices, for example, still primarily rely on silver photography.

http://www.silverusersassociation.or...r/demand.shtml

In 2004, total fabrication fell 2% to a six-year low of 836.7Moz. This figure is more than the amount of newly mined silver (634.4 Moz), however, scrap metal accounts for approximately 25% of the world's consumable silver. Industrial demand has grown with the increasing use of electronics and electrical uses. From mirrors to paints, and dental alloys to coins, silver is used in numerous areas. Today industrial uses account for 44% of worldwide silver consumption.
Silver Demand Worldwide

Industrial	367.1 Moz
Photography	181 Moz
Jewelry & Silverware	247.5 Moz
Coins and Medals	41.1 Moz

More recent data shows a decline, but a still significant source of demand:

http://seekingalpha.com/instablog/75...ustrial-demand


This also shows 'investment' demand being the clear driver for silver in recent years.

For what its worth, I owned a photofinishing plant for decades, and we recovered 86-92% of the theoretically available silver. The 1 hour labs averaged about 10% less in my experience.

Out of curiosity - is energy a significant factor in silver recovery?

[shiny!]

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

Out of curiosity - is energy a significant factor in silver recovery?

Large quantities of silver are used industrially, but the amount used in each device manufactured, say, for example, tiny circuit boards used in cellphones, appliances, automobiles, etc, is very, very small. This makes silver uneconomical to recover because the energy output to reclaim it costs more than the value of silver recovered. So most silver consumed by manufacturing ends up in the landfill. Does this answer your question?

[bart]

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

That may be true for the United States and the 1st world with regards to consumer photography; it is not true overall. Medical devices, for example, still primarily rely on silver photography.


This also shows 'investment' demand being the clear driver for silver in recent years.

I urge caution on some of the numbers since recovery and re-use is substantial. X-ray film is bought by refiners etc. for example due to its substantial silver content.

Out of curiosity - is energy a significant factor in silver recovery?

Not much, electrostatic devices or osmosis devices require little power. Most small labs just use a specialized bucket with steel wool in it, no power needed at all.

[verdo]

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

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.

So before I go into my question, I want to apologize for bumping this. I'm a long time follower, but a first time poster. I wanted to make a new thread getting the itulip consensus view on silver today, but I really did not know the right place to make it on this forum. Its been some time now since the call, and I've been reading through much of what was on here and I wanted to see what the opinions were. I personally didn't see what happened last year as the final end for silver. If gold was as small a market as silver is, I think the correction in gold could have been almost as severe. But beyond that, I find it hard to believe that silver wont retest the $50 level if gold rises back up to test the $2000 level. Am I the only one who thinks this way atm? Also, in terms of the posts i quoted from Eric, I just wanted to know if his view personally has changed at all. He made some pretty scathing attacks here on the silver expectations going forward after the crash, but we are right now hovering around Eric's 'consensus price' view (which I've bolded), and judging by what he wrote, this consensus price was supposed to be a fallacy. I'm not attacking you Eric, or anything like that...so i apologize if I came off that way. I'm just very curious if you still think silver is a bad investment, and that in terms of precious metals, we should be gold only.

If high inflation is really what we see comiing, how could silver possibly not perform in that environment? When it comes to periods of high inflation, silver is practically queen bee. I mean, I understand that silver wont be money and that central banks aren't buying it. But that was true in the 70's also, and silver rose several thousand percent because the public bought into it with the same fervor that brought gold prices up. Again, I just find it very difficult to believe that gold will move back to $2000 and silver will stay where it is right now. The dynamics that got me into silver (inflation fears, low interest rates, etc) really haven't changed, so I just don't understand the argument for silver being a poor buy right now. It just doesn't make much sense to me, but perhaps one of you (or Eric himself) can throw out some thoughts.

Btw, right now I hold both gold and silver, and I was actually planning on buying more of both. Should I just buy gold? Should I continue with the plan to buy both? or should I not only buy gold solely, but sell what silver I have and put it into gold?

Thanks

[bart]

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

My $.02 worth, mostly in TA-ville.

Next target on gold, around $2040. I'm still looking at a ~$1775 target by the end of the year as I established near the beginning of 2012, but with a trip down to the $1680 range quite possible.

Next target on silver, just under $40 with a spike down into the $31 range before EoY. I have no EoY target on silver.

As far as which to buy or trade, whether short or intermediate term, good advice that I got from a successful geezer trader in the 70s is to watch the gold/silver ratio (GSR) ( http://stockcharts.com/h-sc/ui?s=$GO...d=p31633526550 ) and use trend lines of a period length that is close to your average trade length. Short term traders use daily or weekly, intermediate use weekly or even monthly.
When the GSR is headed down, the probabilities and rule of thumb guidance are for higher inflation and/or "uncertainty" (social 'upsets' included) with the opposite for GSR going up.

It remains my strong belief that silver will hugely outperform gold in the inflation blow off that's ahead, but not imminent.


YMMV, as always. I'm far from always right.


Lastly, the $34 area on silver is in my opinion due to it being a long term support/resistance level (even in 1979-80). It's also a Fibonacci number... and wacky/weirdo traders don't exactly always make strict or logical sense, and EJ is very much not a weirdo trader.

[BadJuju]

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

Btw, right now I hold both gold and silver, and I was actually planning on buying more of both. Should I just buy gold? Should I continue with the plan to buy both? or should I not only buy gold solely, but sell what silver I have and put it into gold?

Thanks

I think the point was that gold would simply be the better investment of the two due to greater returns.

[verdo]

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

My $.02 worth, mostly in TA-ville.

Next target on gold, around $2040. I'm still looking at a ~$1775 target by the end of the year as I established near the beginning of 2012, but with a trip down to the $1680 range quite possible.

Next target on silver, just under $40 with a spike down into the $31 range before EoY. I have no EoY target on silver.

As far as which to buy or trade, whether short or intermediate term, good advice that I got from a successful geezer trader in the 70s is to watch the gold/silver ratio (GSR) ( http://stockcharts.com/h-sc/ui?s=$GO...d=p31633526550 ) and use trend lines of a period length that is close to your average trade length. Short term traders use daily or weekly, intermediate use weekly or even monthly.
When the GSR is headed down, the probabilities and rule of thumb guidance are for higher inflation and/or "uncertainty" (social 'upsets' included) with the opposite for GSR going up.


YMMV, as always. I'm far from always right.


Lastly, the $34 area on silver is in my opinion due to it being a long term support/resistance level (even in 1979-80). It's also a Fibonacci number... and wacky/weirdo traders don't exactly always make strict or logical sense.

Well, I'm not too interested in the whole quick trading thing, but I'll check your link out. I just see the next few years as a continuation of a general commodities bull market, which is why I'm confused as to why Eric hasn't bought back (or most ituliper's from what ive read so far) silver.

I think the point was that gold would simply be the better investment of the two due to greater returns.

Okay but why would silver not continue to outperform as it has over the last decade, and as it did at the end of the bull run in 1980? When I saw Eric's call, I had half-expected that he would take the profits he made from the sell at the top, and buy it back after the crash had completed. But since he hasn't bought any back, that tells me that the view here is that the silver story is over. That is what I was curious about.

[bart]

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

I think the point was that gold would simply be the better investment of the two due to greater returns.

The last bull from 1966-1980 per the hard vs. paper asset cycle:

Gold went from $35 to $850, 24.3x
Silver went from $1.29 to $49.45, 38.3x

Similar stats from prior cycles although not as big a difference, and perhaps this time is different.

[bart]

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

Well, I'm not too interested in the whole quick trading thing, but I'll check your link out. I just see the next few years as a continuation of a general commodities bull market, which is why I'm confused as to why Eric hasn't bought back (or most ituliper's from what ive read so far) silver.
...

The data applies to the long term too, as far as what to buy when and what balance to use between silver & gold, or at least it has for me in over 15x'ing my net worth since 2004.

YMMV


By the way, here's my hard vs. paper asset cycle since 1900 to which I referred.

[BadJuju]

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

Okay but why would silver not continue to outperform as it has over the last decade, and as it did at the end of the bull run in 1980? When I saw Eric's call, I had half-expected that he would take the profits he made from the sell at the top, and buy it back after the crash had completed. But since he hasn't bought any back, that tells me that the view here is that the silver story is over. That is what I was curious about.

Oh, I don't know. I just assumed that is why EJ recommends gold over silver. Personally, I hold equal parts silver and gold.

[EJ]

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

Time for a quick update to answer the key question here.

Question: Why not buy back into silver when it fell to $27 from my sell price of $48?

Answer: The silver play was for a 628% gain from $4.25 to $48.50 between 2001 to 2011. It won't be repeated.

To get another 628% gain on silver from $27 it has to rise to $179.

Realistic?

No.

Game Over.

Free tip: Buy cheap. It's the only way to make money.

At $27 silver wasn't cheap like it was at $4.25 in 2001.

That's why I didn't buy back in.

Time to move on.

Move on to what?

That's what we talk about in the subscriber area. There are always un-loved and under-priced things to buy, but it takes discipline to find them and distinguish the undeservedly underpriced from the deservedly low priced.