Cheap Silver: Whither the Ratio?
By Brad Zigler
Back in November, we wrote about the history of the gold/silver ratio (What's Better: Gold Or Silver?) and a novel approach one fellow's taken to determine the white metal's relative value. Back then, the gold/silver ratio was 55-to-1 and silver bulls were awaiting the ratio to weaken in the white metal's favor.
We touched on the subject again in January (More Ruminations On Gold And Silver), just as the ratio actually began to slip lower.
The slope didn't prove very steep and the ratio bottomed at 47-to-1 in March, setting up a move to the 51- and 52-to-1 plateau that held ‘til now. The August 15 metals sell-off sent the ratio racing northward as silver's price dropped at twice the rate of gold's.
Gold/Silver Ratio
The ratio's spike to the current 61-to-1 level is pooh-poohed by silver bulls who argue that there's a "natural" level around 43-to-1 it should now occupy. Silver, say these pundits, tends to rise in the latter part of a precious metals upswing and, since we're in the early going of a second-stage bull market, silver's poor performance is not unusual. "Just wait," they say.
Well, technically, these prognosticators may have a case. As scary as silver's recent tumble may be, the market's long-term bullish trend is still, chartwise, intact.
A look at the monthly chart for COMEX silver puts the metal's current state in perspective. The bull market began in earnest in 2004, from a $6-an-ounce base. The first crescendo was sounded above $15 in May 2006, leading to a correction and a test of the $10 level. Silver then found support and resumed a much more orderly assault on the $14 level. Attaining that price in February 2007, silver corrected $2 over a six-month period, gathering strength for its next leg up from its $12 base. By March 2008, silver had soared to over $20 an ounce and has since dropped to test $16.
COMEX Monthly Silver
Now, the recent sell-off in the spot contract actually took prices down to the $12 level. There are only four trading days left in August, so it seems likely the monthly chart's going to look a lot different in September. Support at $12 has been tested four times and held in the 2006-2007 run-up.
A look at silver's weekly chart allows us to zoom in on the support at $12.
COMEX Weekly Silver
That brings us to the daily chart. If all you did was glance at this chart, you could easily become pessimistic about silver's prospects. There are, however, a couple of noteworthy indications of hope.
COMEX Daily Silver (September '08)
First, there are price gaps left to fill. On August 15, September silver opened more than a dollar lower than the previous day's close, leaving a gap partially filled by yesterday's rally. Markets abhor price gaps just as nature hates vacuums. Gaps are trading targets and are usually filled. There's yet another gap at the $17 level left from the opening on August 8.
Second, RSI - a measure of market strength - has formed a double bottom, indicating the bearishness may be waning.
All this, of course, doesn't guarantee that the ratio will reverse course and resume its downward course, but it may provide succor to those who hope for it.
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This article has 14 comments:
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bearfund
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547 Comments
Aug 22 11:36 PM-
Jackal
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13 Comments
Aug 23 10:26 AM-
Tesa
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29 Comments
Aug 23 11:44 AM-
The Vet
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15 Comments
Aug 23 11:53 AMNot a single ounce of this silver actually exists and none of it will ever be delivered to a buyer of silver. The whole transaction will be settled some time in the future in paper and in effect has no influence on the true supply or demand for silver metal even though it has a huge influence on the price.
www.investmentrarities...
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Jimbo
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140 Comments
Aug 23 12:00 PM-
Ernie Montague
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177 Comments
Aug 23 12:00 PM-
User 30121
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340 Comments
Aug 23 04:43 PMIn the meantime, friends, BUY like your future depends on it....BECAUSE IT DOES! And I DON'T mean paper silver. There is no such thing, unless you will be sucking air. Take PHYSICAL POSSESSION of any silver you can lay your hands on.
(There is no charge for this advice!!!!!)
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Managing Editor
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130 Comments
My Website
Aug 23 08:20 PMWhat advantage is obtained by buying an asset that has provided a 1.7% real return per annum since 1970?
The inflation-adjusted breakeven for silver bought at the $4 level between 1974 and 1977 would be $18-20. The breakeven for gold bought at the 1981 average price of $10.49 would be $25.38.
Taking inflation into account, you haven't broken even on your $10 purchases after 27 years. Isn't THAT an example of losing one's shorts?
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chux08
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42 Comments
Aug 24 12:37 AM-
chux08
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42 Comments
Aug 24 12:53 AMYou know the more I think about that statement, the more B.S. I think that is. If I'm not mistaken there was a big run-up in the price of gold and silver in 1980 and though I'm lacking on specific numbers, I have read that a portfolio containing gold and silver would have and did OUT PERFORM the S & P index as well as the stock market over that same course of time.
Like Howard Ruff who's often accused of being a gold bug he politely mentions that up through 1980 he didi indedd like and own gold and silver. But after making lots of money by selling near the top he never again dabbled in precious metals. Over 24 years went by before he realized again that the time was right for investing in precious metals and again he "bought in".
And that's my point: who in their right mind would've been holding "1.7% real return silver" all those many years, when in reality it only paid to own precious metals a few years before the 1980 run-up and subsequent sell-off??
No wonder you're so fond of that "1.7% real return silver" there Editor....
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jt
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99 Comments
Aug 24 02:12 AMI'm copying here Ted Butler's latest missive entitled
The Smoking Gun
By: Theodore Butler
-- Posted 22 August, 2008 | Digg This Article | Discuss This Article - Comments: 8
For years, the data contained in the weekly Commitment of Traders Report (COT), issued by the CFTC, have indicated that several large COMEX traders have manipulated the price of silver and gold. For an equal number of years, the CFTC has reluctantly responded to public pressure over this issue with blanket denials of any wrongdoing. Many analysts have agreed with the CFTC’s position, conjuring up various ways to explain why a massive short position held by a handful of traders is not manipulative.
The recent widespread shortage of silver for retail purchase coupled with a price collapse appears to have shaken these analysts’ confidence that the COMEX silver market is operating ‘fair and square.’ Well it should, since there is no rational explanation for a significant price decline going hand in hand with product shortages other than collusive manipulation.
For any remaining doubters that COMEX silver and gold pricing is manipulated, the following CFTC data should be considered. This data is taken from a monthly report issued by the CFTC, called the Bank Participation Report. Here’s the link for the report -
www.cftc.gov/marketrep... The relevant data is found in the July and August futures sections. I will condense it.
These facts speak for themselves. Here are the facts. As of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38%.
For gold, 3 U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and 3 U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an eleven-fold increase and coinciding with a gold price decline of more than $150 per ounce. As was the case with silver, this is the largest short position ever by US banks in the data listed on the CFTC’s site. This was put on as one massive position just before the market collapsed in price.
This data suggests other questions should be answered by banking regulators, the CFTC, or by those analysts who still doubt this market is rigged. Is there a connection between 2 U.S. banks selling an additional 27,606 silver futures contracts (138 million ounces) in a month, followed shortly thereafter by a severe decline in the price of silver? That’s equal to 20% of annual world mine production or the entire COMEX warehouse stockpile, the second largest inventory in the world. How could the concentrated sale of such quantities in such a short time not influence the price?
Is there a connection between 3 U.S. banks selling an additional 78,611 gold futures contracts (7,861,100 ounces) in a month, followed shortly by a severe price decline in gold? That’s equal to 10% of annual world production and amounts to more than $7 billion worth of gold futures being sold by 3 U.S. banks in a month. How can this extraordinary concentrated trading size not be manipulative?
Because prices fell so sharply after the short sales were taken (with the appropriate dirty tricks as I have previously explained) holders of known physical silver in the world suffered a decline in value of more than $2.5 billion and long COMEX silver futures holders suffered a similar $2.5 billion decline in the value of their contracts. In gold, because the dollar value held is much greater than silver, investor losses were much greater, on the order of hundreds of billions of dollars on their physical holdings. Declines in the value of mining shares adds many billions more. Was this loss of value caused by the concentrated short selling of 2 or 3 U.S. banks?
What real legitimate business do 2 or 3 U.S. banks suddenly have for selling short such quantities of speculative instruments over a brief time period? Do we want banks to be engaging in this type of activity? If the manipulation was not successful, would U.S. taxpayers be called on to bail out yet another bank speculation gone bad?
Do the traders who lost money in the recent price collapse of silver have a reason to believe that their money is now in the pockets of these two or three U.S. banks? If so, do they have recourse?
The data in the Bank Participation report is clear and compelling. that it is hard to conclude anything but manipulation. It is beyond credulity to conclude other than two or three banks caused one of the most severe price collapses in precious metals history. The CFTC has a lot to answer for as the regulatory agency responsible for preventing this type of blatant manipulation.
news.silverseek.com/Te...
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jt
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99 Comments
Aug 24 02:17 AMnews.silverseek.com/
TedButler/
1219417468.php
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Managing Editor
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130 Comments
My Website
Aug 24 03:46 AMYes, indeed, there was a big run-up in precious metals prices in 1980. The average nominal price for silver that year was $20.98 per ounce. Adjusted to 2008 dollars, that's the equivalent of $56.01.
From that alone, you can tell how far silver's got to go to provide a real return to fellows like Ernie.
As for the S&P 500 index, its real rate of return since 1970 has been 2.8% per annum, more than a full percentage point better than silver's.
Precious metals may indeed offer portfolio benefits, but that's more a diversification artifact than a return enhancement. Put plainly, silver and gold zig when stocks zag. Overall portfolio volatility may be reduced with an allocation to metals, but at a cost.
Siince 1970, though, the reward-to-risk ratio for silver has been 0.19; for S&P 500 stocks, its been 0.58. To allocate capital to silver, you have to decide what other asset class(es) have to be diminished and what effect that diminution will have on expected returns.
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usslbcgn9@earthlink.net
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163 Comments
Aug 24 05:51 PM