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Factor Update – May 8, 2016

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The bearish case in Silver is back on the table

Seven month symmetrical triangle has been confirmed

Decline on August 25 triggerd an 8-week H&S failure

In recent weeks I have presented to members of the Factor Service the possibility that  why The Silver chart is a textbook example of the veracity of classical charting principles. Some of the features on the weekly graph include:
  • The blow-off top in April 2011 accompanied by record blow-of volume
  • The rising wedge retest of the top completed in September 2011
  • The continuation H&S pattern completed in April 2013
  • The descending triangle completed in September 2014
  • The symmetrical triangle completed in June 2015
8.26_SI_W Read More

Even if Gold and Silver are driving to the final low, so what? It still is no reason to be long.

 

It could take many months — or even years — for the precious metals to form a bottom

I am on record as stating my opinion that the current down thrust in Gold, Silver and Platinum is likely to be the final leg down in their respective bear trends. If you inappropriately still own precious metals from higher prices, please do not take comfort from my belief we are headed for a low.

There is a huge difference between the end of a bear market and a bottom. Even if the precious metals find a final low, you could grow old and die before the next bull trend bails you out.

Let’s look at history.

The bottom in Gold following the 1974-1976 bear trend required 14 months to bottom. There was no reason to be a bottom picker during this bear trend.

7.20.Gold_W_1976 bottom

The bottom in Gold following the 1980-1999 bear trend required more than five years to bottom. There was no urgency to pick the bottom of this 19-year bear trend.

7.20.Gold_W_1999 bottom

Bottoms require time, especially in raw material commodities. SELDOM do raw materials create “V”-extended lows. Take a look at the current Gold chart. What possible reason is there to become a Gold bull even if a low might be near? Answer — ABSOLUTELY NO REASON!

7.20.Gold_M

Based on history, there is even less urgency to be an owner of Silver. It required 20 years for Silver to bottom after the 1979/1980 bull market, finally completing its bottom in 2005. I remember this well — I became a major bull in Silver in late 2005 based on classical charting principles.

7.20.SI_Q

When I think about Gold and Silver entering the final stages of their bear trends, my frame of reference is short covering, not trying to pick a bottom as a buyer. Even if the precious metal markets are in their final down thrust, it could be many months or even years before it is time to seriously become a bull again.

$GLD, $GC_F, $SI_F, $SLV, $PL_F

 

 

Chart of the Day — with a Hearty Hi-Ho Silver Away

 

Silver could be experiencing a serious technical breakdown

 

And with it, Silver bulls might experience a serious emotional breakdown

 

Whenever a market makes a new high or low for a move, a technical trader must ask him or her self the following question:

“Is this price movement a blow-off, to be followed by a reversal, or is this price movement a sign of another leg of the dominant trend?”

Let’s review the Silver charts.

The decline in mid September completed a 16-month descending triangle pattern on the weekly chart. This pattern implied an eventual decline by Silver to 13.16 or so.

10.30_SI_W

The market bottomed on October 3 and began a mild and dull 3-week rally that took the form of a small rounding pattern or flag on the daily graph. The strong decline today — IF IT FOLLOWS THROUGH — would be an indication that the market will trend steadily to the 13.16 target.

10.30_SI_D

Shorts must realize that a breach of the October 30 high, and even more so, the October high, would place the interpretation into doubt.

 

$SLV $SI_F

 

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Debunking false claims made by the Silver bulls

 

Silver production has increased despite falling Silver prices

 

Twitter and other dialog forums on the web are filled with Silver bulls who claim that miners will not mine when Silver prices fall below the cost of production. Unfortunately, many of the claims made by rabid Silver bulls do not stand up to critical examination.

First, global Silver mining production has actually increased despite falling Silver prices, as shown on the graph below. In fact, since 2011, Silver mining production has increased by 8.6% despite a decline in the average annual Silver price of -32.3%. From 2004 through 2011 — a period with booming Silver prices — global mine production increased by an average of 3.0% annually. Global mine production increased by 4.2% annually since the 2011 price top.

 

Silver Production vs. Price

No doubt some small marginal-cost-of-production mines have shut down. So what? Bull markets in all raw materials bring forth high-cost producers. But the addition and then withdrawal of such producers has little impact on overall global production output. The commodity markets do not guarantee a profit to “Johnny-come-late” producers.

Even if  Silver prices fell below the cost of production of the large international mining operations, mining would continue, and perhaps even accelerate. Why? There are two factors at play. First, the cost of shutting down a huge mine only to re-start it in the future is an extremely expensive proposition. Second, during periods of low Silver prices, mining operations attempt to become more efficient — and this efficiency can include increased Silver production.

Then there is the matter of production cost itself. Silver bulls claim that the cost of producing Silver is well above $20 per ounce. Kitco.com recently reported a production cost of  $24.05 per ounce.

Yet, the Silver industry itself reports drastically different figures. According to a survey in 2014 by the CPM Group (a reputable commodity consulting company), top producers have a production cost below $10 per ounce. The Silver Institute World Silver Survey 2014 listed the cost of production in 2013 at $9.27 per ounce. Keep in mind that this cost does NOT include capital expenditures, exploration, corporate overhead and many other financial burdens incurred by mining operations. The “all-in” cost of production will vary substantially from company to company. But the global giants will continue to mine even if they are mining at an “all-in-cost” loss.

My point is that Silver bulls who support their bullish views by claiming that the industry cannot operate at current price levels are crying wolf and talking their position.

$SLV $SI_F

 

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Putting the current bear markets in Gold and Silver into a longer-term perspective

 

 

Silver bulls may eventually be right, but they are still idiots.

 

By contrast, Gold bulls represent — by and large — a thoughtful group of folks.

As a trader and blogger, I love to have fun at the expense of Silver bulls. No other market I trade has a larger and more obsessed cult following of non-thinking and emotional “investors.”

I tend to be a Bayesian thinker. In my career as a trader dating back to 1976 I have found that most really good traders are Bayesian, whether they even know the term. No way could a logical Bayesian buy into the nonsense believed by Silver bulls. In mean, these are people who believe the Gold/Silver ratio should be 15 to 1 because it was so proclaimed by some Spanish king 500 years ago!

The daily and weekly graphs of Gold and Silver indicate that lower prices are most likely. Key chart levels are giving way, calling for a possible sharp drop from current prices. Let’s review these charts.

The weekly Gold chart is attempting to complete a 15+ month H&S failure pattern. A decisive close below 1240 will complete this chart configuration and indicate a possible target at low as 1040. HERESY! … the Gold bulls proclaim. It must be market manipulation — after all, the destiny for Gold is $5,000 per oz.

9.12_GC_W

The weekly Silver chart is challenging the lower boundary of a descending triangle. A decisive completion of this pattern would indicate a target of 12.85. ABSOLUTE HERESY OF THE FIRST ORDER! THE GLOBE IS OFF ITS AXIS!!! This cannot happen. Impossible. After all, the cost of mining is $15 or $25 or whatever per oz. Let me say this once clearly for you Silver suckers — the cost of production means nothing. Who cares if small marginal cost-of-production miners shut down. It means nothing. It would take years and years of low prices for the big miners to shut down.

9.12_SI_F

While the weekly and monthly charts are negative, Gold and Silver can be viewed from an ever larger historical perspective. Keep in mind, many a trader has gone broke with the correct longest-term historical perspectives. Historical perspectives are good for understanding, but not for timing investing and trading.

It can be argued that the longest-term trend is arguably up in Silver on the basis of this 100+ year chart.

SI_since 1861_semi log

 

Silver could drop all the way back to $6 to $8 and remain in a long-term bull trend. There is one other chart of Silver worthy of display — the price of Silver adjusted for inflation (i.e., purchasing power as a function of “fiat” money). On this chart we see that Silver is right in the middle of a 100-year trading range — and in fact, has spent many more years in the past century below the current price than above the current price.

SI_semi log_inflation adjusted

 

The 200-year chart of Gold shows a different picture than that of Silver. Gold is in a genuine “for real” historic bull market.

GC_semi log_200 yrs

 

There is a reason for the different “look” of the longest-term Silver and Gold charts — and you Silver bugs are not going to like what I say. Gold is a precious metal and store of value. Gold is actually a real investment medium. Silver is primarily an industrial metal (75% of annual Silver supply is off-taken for industrial uses). You can go ahead and argue with my statistic based on data provided to you in the latest report titled, “Why Silver Will Triple in Price in the Next Five Years,” published by some company that wants to charge you an arm and leg premium over spot prices to sell you coins from some “limited supply, one-time-only” Donald Duck release. But, my figure is right and their figure is wrong.

I actually believe in the long-term prospects for Gold. I think prudent people should be accumulating physical Gold during this bear market and sticking it in their safety-deposit boxes. As for Silver … no interest.

Please click here to read a copy of “The History of Gold Prices” updated late in 2013.

Markets: $GC_F, $GLD, $SI_F, $SLV, $GDX

Note: This perspective represents the type of analysis and thinking delivered on a regular and timely basis to members of the Factor email service. For information on this service, click the “Subscription” tab in the upper menu bar.

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Chart patterns I am watching this week

 

The following is the weekly Factor Update sent to members of the Factor service for the week of September 7, 2014. To become a member of the Factor service, click here for “Subscription Membership.”  If the pdf is not visible below, click here.

 

http://www.scribd.com/doc/239067009/Factor-Update-September-7-2014

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A bearish technical case for precious metals

 

Silver at 1304, Gold at 1075.

I know it is hard to believe. Personally, I am generally a Gold bull. I want the H&S bottom in Gold to complete, followed by a run to $2,000. But, a very bearish case can be made for the precious metals. First, the H&S bottom bullish case. The H&S pattern is a most reliable chart configuration — in fact, the most reliable of all classical chart patterns. A decisive close above 1,400 in Gold would be extremely constructive.

8.21_GC_Wc

Yet, whenever a clear H&S pattern develops there is a possibility for a H&S failure. A close below the 1240 right shoulder low in Gold would be an indication that the H&S bottom is failing. The target would be 1074. A close below the late Jul low of 1281 would not be constructive — and, in fact, would suggests that the bears have control of the market. The market appears to be rolling over today. I will read a close below 1280 as a sell signal.

8.21_GC_D   8.21_GC_Dv2

The same chart construction can be seen in $GDX, the gold miners ETF. A decisive close above 28.05 would complete the H&S bottom. A decisive close below 21.93 would complete the H&S failure.

8.21_GDX

Then there is Silver — which, in my opinion is not even a precious metal in the true sense. I am constantly amazed by the number of people who think t he world is running out of Silver. Might they have believed the world was running out of carbon-based energy 10 or 15 years ago? These people also believe that the Gold/Silver ratio should be 20 to 1 just because some king of Spain declared it to be so some 500 years ago. I have commented numerous times during 2014 that Silver could be forming a descending triangle formation. This pattern generally has bearish implications. The top completed in Silver in Apr 2013 established an yet unmet target of 16.70. A decisive close below 18.00 would extend the downward target to 1300.

8.21_SI_W

$SLV, $SI_F, $GLD, $GC_F, $GDX

 

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Have precious metals begun a new bull market?

 

Gold is forming a possible massive H&S bottom

On Sunday, June 15, I issued a Tweet that Gold was forming a possible H&S bottom pattern. See here for chart posted.

Additional evidence exists that the precious metals are forming major chart bottoms that could propel the next bull market phase. To gain a fuller understanding of the importance of price charts in Gold, please read the “Chart History of the Gold Market,” last updated in November 2013.

The H&S bottom in Gold is now clearly defined on the daily and weekly charts (weekly chart shown). The rally today is strong indication that the right shoulder low is in place. A close above 1400 is required to complete this bottom.

6.19_GC_W_v1

In the event of such a close, the swing target in Gold would become 2,400 as shown on the monthly graph. This swing target assumes that the advance from the Dec 2013 low will equal the advance from late 2008 through Sept 2011. Remember, a H&S bottom is not a H&S bottom until it is completed.

6.19_GC_M

Silver also presents an interesting technical study. The decline into the May low had all the earmarks of a bearish descending triangle. Yet, the market was on the ropes but could not be put down. While failed descending triangles are not typical bottom patterns, they do occur.

6.19_SI_W

Also, it is possible to argue that the entire period since the Apr 2011 high has formed a channel on the semi-long monthly graph. On an arithmetic scale, the period since the Apr 2011 high has formed a bullish wedge.

6.19_SI_M_semi

6.19_SI_M

The long-term chart of Platinum exhibits a possible 6-year triangulation as part of a bull trend that began in the last 1990’s. If this labeling is correct, Platinum’s target could extend toward 2,750. Obviously, this will not happen overnight.

6.19_PL_Q

Traders should be alert for buying opportunities consistent with their approach to trading.

 

Markets: $SLV, $GLD, $GC_F, $PL_F, $SI_F

 

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Silver may be losing its remaining tarnish

 

Silver charts indicate that another downward move in the 36-month bear trend could be unfolding

Silver formed a blow-off top in late April 2011 (marked as “A”). See my blog posts issued at the highs here (How do you spell bubble … SILVER) and here (8 years of global Silver supply changed hands last week). Following the sharp $17.50 break from the April 2011 high, the market rallied back above $44.40, forming a bear wedge (marked “B”). The completion of the 18-month rectangle (marked “C”) in mid April 2013 produced a yet-unmet target of $16.60. I believe this is where we might be headed.

4.30_SI_W

The daily price chart now displays a possible 10-month descending triangle. If this labeling is correct, descending triangles most often produce sharp declines. The Silver market has been remarkably pathetic in its inability to rally when Gold, Platinum and especially Palladium show signs of strength. As a trader looking at markets within market groups, it has been my policy to be long the strongest when bullish and short the weakest when bearish. Silver is the weakest of the precious metals (although my contention has always been that Silver is a raw material commodity, first and foremost, and only secondarily a precious metal).

4.30_SI_D

A decisive close below the Dec 2013 and Jan 2014 lows would arguably complete this triangle and establish a measured-move target as low as the mid-$13 range, although I would feel more comfortable with a target of $15.50. When dealing with such a clear chart sell signal, traders always need to be alert for a bear trap. A wash-out of sell stops below $19 and even $18 followed by a sudden upside reversal would be an indication of a terminal blow off.

$SLV $SI_F

 

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