The big question everyone's asking is if we're seeing the end of the correction in silver prices, and are now heading into the next big up leg in a long term bull market. I've noted that we should know better within a week or so whether that's what we see happening...
So, given timing is everything, and that the goal is to divorce emotion from the question while sorting the short term view from the long term perspective... the first questions you want to ask are about the contrast between the long term and short term, and where we are relative to a dispassionate look at history...
Fundamentals first...
The long term outlook for silver is clearly dependent on two or three things that have been well enough hashed out before... and I'm not going to rehash them in depth now, rather than mention them by way of comparing "where we are" relative to the market expectations they reveal or create. Boil it down to the risk of inflation or hyper-inflation in the future, the utility of precious metals as a reserve of value and a hedge against other types of economic uncertainty, and in silver, the basic supply/demand fundamentals, including changes in industrial demand, and changes in investment demand, a return to historic proportions in pricing between gold and silver, etc. In the long term, I'm fully onboard with the idea that we have significant forward risks in the economy to deal with, including the risk of future inflation and/or hyperinflation... black swan events that might overshadow the market events of 2008/2009... and a reality in supply that requires that prices in the future will average higher than prices in the past.
But, the questions we're asking now just aren't THAT fundamental... instead being a question of short term market dynamics and trading, not a question of the inevitability of change in the future.
Do we currently have any major inflation risk ? The answer is "yes"... but, it is still mostly a forward risk, and not a risk that is being significantly realized now. Reality is we've not yet reached and moved past the "tipping point" between inflation and deflation... there is still as much or more deflation risk as inflation risk... which doesn't mean the inflation risk isn't there, and doesn't even mean we're not having some inflation... but, it isn't there in isolation from its at least equal and opposite counterpoint. So, while we may have inflation risks... we're not seeing indications of market instability on the cusp of the massive hyperinflation some expect... that is the driver required to realize the most optimistic price predictions.
Black swans ? They certainly do seem to be out-populating the white ones these days... so its reasonable to ask questions about changes in the environment that appear to provide the black ones with evolutionary advantages now. We're returned to pre-Glass Steagal market rule sets... and we're now seeing pre-Glass Steagal market behaviors. That doesn't appear it it going to change, so, market stability is a thing of the past, and we should expect markets in the future will behave as they did in the 1800's, not the 1900's... with financial panics occurring regularly... with vastly greater volatility than we generally had in the last century, and with less power to control markets now than was resident in the tools of the perpetual inflation machines in the last century. Are we heading toward another market crash ? Shooting war with Iran ? Trade war with China ? Currency value wars with... everyone ? The answer is an unqualified "yes"... with a caveat in the qualification that knowing "where" you're heading, eventually, doesn't have the same practical value as knowing when you'll get there... and, the whole point of the current exercise is... timing a trade...
Reality in supply and demand ? We've now got to be VERY close to a market situation where we've reached and passed the point where the market balance that existed in supply and demand for silver on the industrial uses side has changed. Long term... we've been living off of a couple of centuries worth of over-accumulation in silver... driven first by the Spanish mining the new world mines in the Americas with native slaves... then by the U.S. Congress subsidizing western states production in the 1800's. That roughly 500 year long hangover in the market is dissipating... and I'd be stupid to ignore that... but, again, we're trying to time a trade this next week, next month, this year... not trying to guess which was silver will go in the balance of this century. Shorter term... decade scale... photographic uses were thirty plus percent of the market not that long ago, and they've basically gone away. Sprott buying Kodak's stash... seems a fitting end to that 20 year long process... which has been suppressing silver prices shorter term. Good for the decades long outlook that trade is now done.
But, reality, for now, is still that the growth in industrial demand has backed off enough to give us some breathing room on the supply side... because demand is tied to the economy, and (as has probably not escaped your notice) the world is still in the throws of a global economic slowdown. That fact means that we're not bumping into supply limits... for now. That will clearly change, and could change in a hurry, were the issue that we face to resolve in a pace of growth in the economy that means "running out... soon." But, we're not there right now...
Too many in the market posture try to posture PM investing as "the opposite" of others market focus, and its inherent dependence on the Fed and its actions to promote growth through inflation... when the opposite is true. "Don't fight the Fed" is as true and more true of investors betting on inflation (long precious metals) as those who are betting on Fed policy driving "growth" while ignoring the inflation resulting from the policy that both groups focus on. For now... the Fed is doing a bit too well at fighting inflation, missing its targets for what it considers healthy, now, to ensure we avoid entering a deflationary spiral into a global depression.
That, and silver prices HAVE moved higher recently, you know? The current price in this declining market is still double that two years ago, three times higher than early 2009... ten times higher than the lows of the 1980's... which seems it is supporting that decade to century long scale shift in prices tied to change in demand supply curves... right along with changing interest in mining the stuff... as you see Sprott and others doing, now...
The rest... is about the nature of the indicators in sentiment given the market we're in now... the short term market dynamic. Is this a bottom ?
There's no denying that silver has made a nice move higher, recently, so, don't be confused by the timing elements in those price moves, vs those in the long term market support for continuation. Still, even if that move IS defining a return of the bull, what's happening now doesn't create any urgency... there will still be a long time to make decisions... I'm not seeing a need to hurry into any trade now near short term chart highs in a market where I'm looking for a bottom to form... and still not seeing what looks like a pattern you see at market bottoms.
I'm just not seeing chart features that I tend to look for that define chart bottoms... so, I'll wait until I do.
Otherwise, my look at the charts for USSIF has two focus elements... one using SLV as a proxy for silver, and the other charting USSIF. SLV first.
FWIW, the results of my efforts looking at the SLV charts have me not in full agreement with some others...
Sticking to analysis on a two year weekly chart... The descending triangle from May to Sept resulted in a dramatic downside failure... Some now are posturing that the proper focus in looking at a descending triangle is to look at that from Sept to Dec... so that if you chart that... what you see is an "upside breakout from the descending triangle" occurring now. If you applied the same method to the May to Sept period, you'd show an "upside breakout from the descending triangle" in August last year... which held for four or five weeks... until mid-September. Honest plotting of the current chart from the market peak in April/May to the recent lows will show that the current "upside breakout" is a near proxy for that the method shows in August last year...
To see that pattern broken, what we need to see is an upside move that first breaks and holds resistance at $33 to $33.50, and then moves above the second derivative bolly, currently around $38 (and coming down). From a purely technical view of prices... we've not seen a break out from the down trend yet... but, we might still see that happen dynamically next week... and will need to see silver move above $37, hold, and keep moving higher to confirm an upside breakout... Otherwise, you might expect to see the next three weeks look like the last half of August, and the first week of Sept last year... before seeing another move down.
The sentiment in the weekly charts... isn't suggesting the upside breakout scenario is real.
1. The chart proxy you might look at... the left shoulder on the other side of the head and shoulders pattern... the last half of January first half of February last year... noting the last four weeks volume, now, are a bit less than the volume in that period ?
2. Up to April 2011 Williams %R showed silver "overbought"... a good thing as long as the trend was intact... That indicator broke at the high, and tracked prices from May to September, leaving open the potential resumption of the bull market... but, in September, it broke down into "oversold" territory... and has only moved lower since then...
Look at a six year weekly chart plotting price,MACD and ADX... six years being near the limit in SLV's history. That chart intrinsically has a bias tied to the creation of SLV, which is itself worth considering... The period selected also defines the "base" or zero line in the MACD which is useful to consider. From the start of trading until Sept 2010, MACD plots higher than price... while price double tapped the zero line twice, in March/July 2008, and in Dec09/May 2010... then, in August 2010 price moved above the MACD zero line, with MACD and price tracking in parallel, with the MACD staying higher than price in the burble on the left shoulder in Jan 2011... on into the peak.
And, now ? From April 2011 price plots above MACD is the new normal... while the most telling feature on this chart is that formed from December 2011... where you see ADX at a peak the first week of January, and MACD carving out a deep low... a classic "pinch" chart. And, true to form, as the "pinch" broke you see a nice pop from $27 to $33 beginning to resolve the oversold condition that a chart pinch shows... only with the price still hanging dangerously out there in space, miles above MACD support down at $10...
That look at the chart says we may see price move higher still to test the comparable linear move in the rebound peak in August, around $37.50 now (remarkably coincident with my other technical analysis from the short term charts re the descending triangle price targets to confirm an upside breakout). From there... either we'll see a remarkably strong market with an unprecedented display of strength that drags MACD up off the floor to provide support for continuation... or we'll see the market tank to correct price back to MACD. Not going out on a limb much to suggest that the typical move out of a pinch, when price is higher than the other plotted chart features, is to see price correct to form a proper chart low...
Always want to check your chart work with comparisons in different time periods. Look at the same chart in a 3 year weekly period, 2 year, 1 year... and the primary impact is to bring the MACD zero line up to $21, $24, and $32... with the one year chart bringing the divergence in price and MACD back into "balance"... relative to short term market perspective... which it would have to do...
That really reduces the short term question to one of whether the short term charts or longer term views should dominate market participants behaviors now...
My answer to that is that what we see in the market now is still a fierce belief strongly held by a small number of market participants. I share their strong belief re the long term. However, markets pricing functions require participants willing to pay more to pry ounces or shares out of the hands of the true believers... in the short term.
We don't see the sort of things, now, and didn't in April of 2011, that define market tops. CNBC was not dominated then by news of hot mining stock IPO's and buyouts of explorers by producers... we're no where near returning to a historic "normal" percentage holdings in gold and silver in investors portfolio's that are balanced to weather turbulent markets. 2011 was not the market top. But, that same logic requires that the market we see now... is not one in which new investors are clamoring to pry ounces or shares out of the hands of the true believers (like me) who are waiting for the perfect storm in flocks of black swans darkening the skies as we observe the outbreak of hyperinflation paired with growing industrial market demand that ramps up consumption... at the same time investors figure out they "have to have" gold and silver as 10% of their holdings to preserve wealth... as the historic 10:1 price ratio is restored...
I think we have to wait another two or three years for that to happen... at least until after the next election...
So, I think the $19 to $20 price target in a correction is still valid...
I've pointed out that the recent changes in our markets, and the shift back to "rules" that dominated the 1800's and before... means that panics and volatility are the new normal. So, I have zero problem suggesting that the long term charts are right.... and what you might expect to see in the markets is an overshoot in expectations, meaning silver prices below $10 again at the bottom...
I'm not predicting that will happen... because I think most people in the market are still ignorant of the rules changes that have been imposed, and what that means in relation to what market behavior "should be" now... that is different than what actual market participants have been conditioned to expect. We should see a gradual return to the market dynamics that dominated markets prior to the last century... but, it will take another decade, or, our experience of "the big one"... for that to happen...
As far as USSIF vs SLV ? USSIF has underperformed relative to SLV for a long time... and that trend may be likely to continue in the short term, if more as a function of bad days in the markets. The shift to a new market with a larger stage will correct the under-performance relative to peers, over time... given a year or two... and comparing USSIF and SLV on a three year chart... USSIF looks good, with a bigger pinch... and obvious chart support SLV hasn't shared, recently... even as SLV still outperforms it in price change...
I'd still rather hold USSIF than SLV now, given its kickers... and I expect we may see the silver price continue higher for another two to four weeks before seeing it correcting lower again, which should allow support for a trade here.
I'll remain cautious on the longer term outlook... still expecting lower silver prices in the weeks ahead... but, USSIF for a SHORT TERM trade over the next two to three, maybe four, weeks... might prove to be worthwhile... but, I'll be nervous about it... and not "set it and forget it" the way I did back in early 2009... and will both think about it AS a trade... looking for a good entry next week... and looking to take trading profits if and when they come, and looking to exit the trade at or before the point where things look to go wobbly again...
I think the USSIF stock specifics outweigh other factors for a TRADE in the short term.
I'll change my mind in a heartbeat if the markets don't prove willing to support my short term timing considerations...
Sometimes hard to shift those gears... to convert your thinking about shares you've had as a "long term hold" in the past... to think about them now as nothing other than another chart based trading opportunity...
I'll do that with USSIF over the next week... and, maybe... two, or three...
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