Silver Market Update

originally published March 31st, 2011

Silver is very overbought and this fact coupled with the dramatic spike in the silver gold ratio would normally be expected to lead to a significant reaction by both gold and silver, as usually happened following such a situation in the past, but these are not normal times.

On its 2-year chart we can see how silver has been romping ahead since it broke out last August and following its latest upleg had become critically overbought by early March, but only a minor reaction followed.

On the long-term chart for silver going back to 1999 we can see that it has hit a target, and while it may continue to an even higher one, gold is looking like a better place to be over the short to medium-term.

The silver/gold ratio chart makes clear in a dramatic manner how silver has greatly outperformed gold in the recent past. In the past this has normally lead to an intermediate reversal in both, but given the predicament the shorts find themselves in, and the extraordinary situation generally, that may not be the case this round. On the basis of this chart an arbitrager would almost automatically switch from silver to gold at this juncture.

As discussed at length in the Gold Market update, there are powerful bullish drivers operating for gold and silver that should ultimately take the prices of both much higher, so the main question remaining to be answered is whether silver's overbought state and the spike in the silver/ratio will result in a reaction soon. About a week ago we thought it would, and there is a scenario where it could happen, which is where leveraged dollar carry trade speculators get "cold feet" if they sense higher rates on the way in the US, and rush to cover their positions, generating a temporary dollar spike, but here we should note that while this may result in a fall in the price of silver in dollars, it should not have a negative effect in most other currencies. Aside from this there are two big technical positives in play for silver right now, which are firstly that it is in "blue sky country" - there is no overhead resistance so it is free to run away to the upside, and its moving averages are in bullish alignment - silver is in a strong uptrend, which could continue for some time despite the overbought condition.

We have seen in the Gold Market update how we have now entered a "new paradigm" with the acceleration in the collapse of the fiat system worldwide gathering pace, and this process has now gathered so much momentum that there appears to be no stopping it - it will end in hyperinflation and a state of acute crisis that forces the re-introdution of some kind of gold standard, with silver possibly playing an important role too. This realization coupled with desperate short covering by trapped major shorts in silver, like J P Morgan, is what is fuelling the extraordinary spike in silver. These circumstances may mean that it is unlikely to react back much, as any reaction is seized upon by the embattled and panicky shorts to cover while they've got the chance. Given the suspected magnitude of their short positions they could generate an unbelievable spike in silver in certain conditions if they really panicked and decided to "throw in the towel".

About a week ago, based on historical precedent, we were of the view that silver (and gold) would probably react back based on the big spike in the silver over gold ratio, and whilst recognizing that this could yet happen in the event of leveraged dollar carry trade speculators taking fright, downside in silver is probably much more limited than in the past in similar overbought situations, because of the desperate shorts waiting in the wings to cover and because of the powerfully bullish background forces at work that look set to propel gold and silver to much higher levels as fiat accelerates towards its final nemesis.

If gold now breaks higher - above recent highs and the restraining shallow trendline shown on its 2-year chart, silver could get to perhaps $50 on this run before it pauses for a more serious rest.