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Silver Going Parabolic, Time to Sell and Reinvest in Gold

Commodities / Gold and Silver 2011 Mar 07, 2011 - 04:19 PM GMT

By: Ned_W_Schmidt

Commodities

Best Financial Markets Analysis ArticleKenny Rogers may not be widely known as a great philosopher, but one of his legendary songs carried a message well worth knowing. It goes, "Know when to hold them, and know when to fold them." Last week in the game of world monetary poker, the ECB raised the limit. Now the Federal Reserve will have to demonstrate it has what it takes to play poker with the big boys. Question is not if it will fold, but when it will fold. June or sooner?


Reuters reported on the statement by ECB president Jean-Claude Trichet concerning the likelihood of the ECB raising rates at the April meeting(reuters.com,3 Mar 2011),

"I would also say that we are mentioning that we are in a posture of strong vigilance and my understanding is that the position of the governing council is that an increase in interest rates at the next meeting is possible"

Consequence of that statement has been a massive bear raid on the dollar, as market participants call the ECB's bet and wait for Federal Reserve to reflect on its hand.

ECB, in anticipating the raising of rates, is not advocating anything particularly radical. Driving the car while looking through the front windshield has always been considered both appropriate and standard. Same is true for the "driving" of monetary policy. Central banks are charged with managing the future, not to be constantly in the process of correcting their previous mistakes.

U.S. Federal Reserve has rarely, if ever, understood that the task is the future, not the mistakes of the past. For nearly two decades, the primary mission of the Federal Reserve has been to provide low cost money to Wall Street. Beranke and his Lap Dogs, one, continue to deny that the massive financial problems of the past decade were a direct consequence of free money, and, two, continue to pursue their policy of free money for speculators.

Free money may benefit speculators, but it does little directly for those seeking to make an honest living. U.S. equity market, as measured by the S&P 500, has risen at a compound rate of about 39% over the past two years. Is that consequence of U.S. economic conditions improving at that speed? No, it, and other speculative markets, have risen because of the Federal Reserve's policy of providing unlimited free money to speculators.

In each of the Federal Reserves speculative bubbles, some individual markets standout as the epicenters of the money binge. Internet stocks were once one. Junk mortgages were another. Today, Silver market is perhaps the center of today's speculative binge. In the chart that follows, historical price history of $Silver is portrayed. That red arrow indicates the outline of the parabolic formation in which it has been moved.

Silver is quite clearly in a speculative bubble. Bubbles are manias that become financed with debt. As most of the trading in Silver is of the paper variety in the form of derivatives, it qualifies as a bubble. Fantasies can indeed be created and imaginary conspiracies can be concocted, but the test of reality can not be permanently denied. If it walks like a duck, quacks line a duck, and looks like a duck, then odds favor it being a duck.

Silver

Parabolic moves, such as in Silver above, are dangerous formations as they defy financial gravity. The slope of that curve increases as it rises. It is as if we threw a ball into the air, and the higher the ball goes the faster it rises, in denial of physical gravity. Reality is that in the case of both physical gravity and financial gravity, ultimately down becomes the path of least resistance.

We know several things about parabolic curves.

One, they always end. Da moon is never a reasonable price target.

Two, we never know in advance when they will end. Better to unload the truck before it is repossessed along with what it carries.

Third, the pain created when they fail is excruciating. Breakfast is more pleasant for the chicken than the hog.

Fourth, they create great opportunities after failure. Auctions of repossessed merchandise are often good times to buy.

For more than a decade we have been doing valuation work on Gold and Silver. While certainly not perfect, that effort has served well as a guide to investing in that period. And yes, any method that also always said buy Gold and Silver would have worked well also.

Valuation, either under or over, never makes a market go up or down. It is, however, most often a precursor of the future direction of a market. And yes, we prefer the role of the chicken at breakfast. Results of that valuation are in the table that follows.

Gold is today the preferred precious metal when compared to Silver. That might not, and likely will not, prevent it from going down when the Federal Reserve folds in June. That June time period is becoming of increasing importance. The current era of free money, quantitative easing, by the Federal Reserve is scheduled to end in June. Should the ECB raise rates in April, Federal Reserve will come under increasing pressure to abandon free money policy.

Free money has been driving financial markets. Should that era of free money begin to end in June, considerable realignment of investment market values seems likely. Silver is simply the most obvious one. Deferring the investment of idle funds, and perhaps taking some profits, might be wise until the June poker hand has been played. The chicken will still be around in July.

By Ned W Schmidt CFA, CEBS

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save investors from the financial abyss of paper assets. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts, about weekly. To receive these reports, go to www.valueviewgoldreport.com

Copyright © 2011 Ned W. Schmidt - All Rights Reserved

Ned W Schmidt Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jim
07 Mar 11, 21:26
Sell silver?

Do you understand the science of supply and demand? There is no silver on the market now. Supply low, demand high. Also, is he aware of the gold silver ratio traditionally being 16 to 1? Again do the math when he is advocating to buy gold. Lastly, how is the government going to cover it's 1.6 trillion dollar deficit? And the interest on it's 14.3 soon to become 15.9 trillion dollar debt? His answer, stop printing money. Please someone tell me I am crazy because I do understand this article and enjoy others perspectives.


Don
08 Mar 11, 12:44
Sell Silver?

"Hey, watch that guy over there picking pockets, but don't pay any attention to my hand as it is approaching your pocket!"

If the current price of silver were being driven by speculation and speculators, then it would be high, but that appears to be a very, very small portion of silver's current market. The real speculators are overheating the DJIA by leaps and bounds, and staying away from silver and gold in droves. Very few people are buying silver to make money, and almost anyone with some pocket change is throwing good money after bad into the stock market. That is where the pockets will be picked--and very soon--again. Meanwhile, if I can convince you to sell me your silver at discount rates, then the profit will be mine--not yours. It's just another way the market maggots have of fleecing those whose eye is on someone elses pocket being picked, while failing to do their homework, and keeping hands off of their own.


Jim
08 Mar 11, 20:48
Sell Silver?

Thanks Don for stating some sanity.


Josh
10 Mar 11, 00:32
Gold/Silver in Double Dip Recession

To the other commenters, view a 5-year chart of silver and tell me how you know for certain it won't crash again with a double dip recession.

The QE beginning in 2009 did nothing to help the economy or any of its fundamentals, but it did drive the silver price to recover its large losses. The double dip will reduce the Dow to below 6,000.

There is still plenty of silver on the market, but everything is being made in 1oz-10oz bars and rounds. 1,000 oz and 100 oz bars are in low to no supply. Companies and dealers know that smaller amounts rake in higher premiums (as high as $3-4/oz) for small trades.

I don't agree with the author's reason for selling silver and buying gold. However, anyone has seen a 5-year chart of gold and silver prices as well as the DJIA and oil indexes would know that gold is the strongest metal to hold in a recession. We're headed for a double dip recession in less than a year, and while silver has shown significant strength and increased demand, it is still too uncertain for anyone to know what will happen this time around. I want to believe that silver had become a monetary metal as gold has been, but I'm still unsure. (I do own both but bought in early on, but I'm sure someone will call me a nay-sayer).

Do understand that silver lost 63% of it value (in dollars) in the last stock market crash ($22/oz to $8/oz). I believe that in the double dip it won't be nearly as bad, but it may still be "bad enough".


Karl
10 Mar 11, 02:59
Sell Silver?

With regard to the ball being thrown up in the air, I like to think of it another way.

What if that ball rather than being thrown up in the air has been held down deep under water (suppressed) for many years and that ball can longer be held down, and now it is racing to the surface, where it belongs.


Jim
10 Mar 11, 13:38
Sell Silver?

I agree with both of you regarding concerns of a double dip in price and with silver being suppressed and could explode. My take on it is where are investors going to invest once the double dip hits? They ran into treasuries last time. Are they going to run to a 14.2 trillion dollar debt with a 1.6 trillion dollar deficit with the government possibly shutting down or into something more stable? I think the mood of investors has changed in the last two years with all the recent spending and do not view treasuries as a solid investment anymore. I could be wrong. But I think if silver and gold do dip, it wont be as severe as I think money from the stock market will funnel into precious metals this go around. Unless the Bernank comes out with QE3 which I think he will do then stocks will stabilize and gold to $1,750 and silver to $50.00.


billy
24 Mar 11, 21:12
huh?

what do you want me to sell silver for? when do i buy it back. are you calling a top? you have been beating this drum for a while i hope for your sake you are right soon. this looks more and more like your view is just plain wrong.


Ted
06 May 11, 08:46
He was right!

Looks like he was right... I have been saying the same thing for a while myself. Too bad I was an idiot and didn't get out at my spot price of $45.


Nicolas Garay
06 May 11, 18:52
Law and Demand "science"

"supply and demand science"?....or better "Supply and Demand" Law!!


Steve
06 May 11, 23:02
Sell Silver?

Not me. I only sell silver if I have something else to invest in.

I like physical, so trading it has large fees.

I just bought some from my dad at 50/oz.

He feels good about making a profit (paper currency) and I feel good about holding more silver and protecting myself from the paper risk.

I'm waiting for the double dip and hoping to grab more at 20/oz this summer.


Mike
07 May 11, 12:03
he was right???

this is far from over. Yes it did take a dive but that does not indicate what its fair value is to be from here on out. There is still a lot to play out on this market. I guess only time will tell.


truthhurtsss
09 May 11, 07:09
you call that trading?

Timing is everything in trading. You don't go around calling for a top for 6 months to a year and when it finally arrives, you declare you were right in your "prediction". A trader would have lost his pants and shirt by then. Being a "broken clock" is not what trading is about.

In any case, when he started calling for a top in silver it was probably in the $20s a year back. Now if you had shorted silver back then, you are still not breakeven yet.

You tell me if this is trading...??? Or something else?


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