Silver’s Underperformance Against Gold
By Przemyslaw Radomski, CFA
Based on the April 25th, 2013 Premium Update.
Visit our archives for more
gold & silver articles.
What happened on
Friday, April 12 and Monday, April 15 on gold and silver markets looked like a
gigantic earthquake – a drop of about $200 (13%) for the yellow and almost $5
(18%) for the silver metal. There has been a lot of hyperbole going on. We even
heard it said that a move of that scale would statistically only be expected
“once every 4,776 years.” Going even further, John Kemp of Reuters calculates
that, based on a
normal distribution (by the way, market
returns are not normally distributed), movements like this can be expected once
in every 500 million trading days, or two million years. Sounds far-fetched?
There have been
plenty of attempts to explain the cause of this enormous plunge. China's economy
grew “only” 7.7% in the first quarter, undershooting market expectations for an
8% expansion. China is the world’s second largest buyer of gold. There were
concerns that the U.S. stimulus may be cut short since minutes of the Fed
released just before the big decline in gold prices showed some officials were
interested in ending the QE program this year. Another theory posits that since
the new Japanese central bank governor promised to re-inflate the Japanese
economy, Japanese government bonds (JGBs) have been on a wild ride. When
investors in volatile assets are asked to put up wider margins they often sell
assets they are holding. In this case,
CME’s decision to raise margins for the entire precious
metals sector is another bearish factor for the short term.
While what
happened looks disastrous, we don’t think that this means the end of the great,
secular bull market in precious metals. Bull markets have a parabolic stage when
everyone is in a frenzy to get in and prices go up in a straight line. We have
yet to see that spike.
Furthermore, we
don’t see any changes in the fundamentals for gold and silver to make us think
the bull market is over. There is still large unemployment, ballooning national
debt, currency debasement and currency war, eurozone problems, QEs etc. etc. We
like gold and silver for the same reasons we have liked them for the past
decade.
The fundamentals
are intact which ‘forces’ silver to rally in the long run but let us now turn to
today’s technical portion to see whether recent events have marked the final
bottom in the white metal or rather further declines are to be expected – we’ll
start with silver’s long term chart (charts courtesy of
http://stockcharts.com).
We don’t see the
same corrective price action as we saw for gold – the yellow metal rallied for 7
out of last 8 days. Silver prices declined this week, except for a quite
substantial move up on Thursday.
Overall, declines
simply continue here (there was a small pullback within the 2008 decline as
well); gold prices corrected quite a bit and silver did not. If this
underperformance continues and gold prices move lower by $100 or so, the
implication appears to be that silver will decline sharply to perhaps the $18
level or so. This price level is created by the July local bottom and the
declining trend channel (parallel, green lines on the chart above), and the
price level where the huge 2010 to 2011 rally began.
Let us now move
on to the short-term timeframe.
Here, in the
short-term SLV ETF chart, the underperformance of silver is very clearly
visible. While there has been some sideways trading, prices have declined
overall, and the lack of any real pullback indicates the overall weakness of
this market at the present time.
Given Thursday’s
close in the SLV ETF at $23.49 (silver at $24.30), we still see no significant
change in silver’s performance – its correction is still very small compared to
the one seen in gold.
Since silver’s
underperformance is such an important issue at this time, we decided to examine
it particularly closely, using silver-to-gold ratio.
In today’s silver
to gold ratio chart, we present a somewhat new view of this ratio. We’ve
discussed the underperformance of silver for some time now so we felt this
graphic would be useful. We believe it’s best to plot the rate-of-change
indicator (ROC) on this ratio as it does a very good job at measuring sharpness
of given moves. The solid line in the chart is the ratio itself with gold’s
daily price in the background and represented by the gold line.
The key point
here is this: major bottoms used to be preceded by a sharp drop in the silver to
gold ratio. We used to see either capitulation of silver investors or artificial
sell-offs before the declines were over. Regardless of what the reasons were,
it’s something that used to happen before the bottom was truly in. Recently,
however, we saw silver’s price decline, but not as sharp as expected relative to
gold if a major bottom was forming. In the recent days, we have seen steady
underperformance rather than a very sharp drop in the ratio. It looks on the
chart like the trend is accelerating, though, sort of like a reversing parabola.
Ideally, we’d
like to see a lower rate-of-change indicator, say -10 or -15 at least before
stating that the final bottom is in. This indicator barely moved when the
precious metals declined heavily earlier this month. The declines seen in 2008
and in the first 2 months of 2010 provide a good example of what the indicator
can do. At first, metals declined but silver not as significantly as gold. Only
when gold formed a major bottom, did the ratio decline sharply. We would like to
see this confirmation also in case of the current decline.
Summing
up, silver has been underperforming recently but not
as extremely as we would expect during a major bottom. It seems therefore that
the final bottom is still ahead of us. Thursday’s move to $24.30 doesn’t
invalidate the above.
To make sure that you
are notified once the new features are implemented, and get immediate access to
our free thoughts on the market, including information not available publicly,
we urge you to sign up for our free
gold newsletter. Sign up today and you'll also get free, 7-day access to
the Premium Sections on our website, including valuable tools and charts
dedicated to serious Precious Metals Investors and Traders along with our 14
best gold investment practices. It's free and you may unsubscribe at any time.
Thank you for reading.
Have a great and profitable week!
Przemyslaw
Radomski, CFA
Founder,
Editor-in-chief
Gold & Silver Investment &
Trading Website - SunshineProfits.com
* * * * *
About Sunshine Profits
Sunshine Profits enables anyone
to forecast market changes with a level of accuracy that was once only available
to closed-door institutions. It provides free trial access to its best
investment tools (including lists of
best gold stocks and
best silver stocks), proprietary
gold & silver indicators,
buy & sell signals, weekly newsletter, and more.
Seeing is believing.
Disclaimer
All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
respective essays at the time of writing. Although the information provided
above is based on careful research and sources that are believed to be accurate,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
thoroughness of the data or information reported. The opinions published above
are neither an offer nor a recommendation to purchase or sell any securities.
Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw
Radomski's, CFA reports you fully agree that he will not be held responsible or
liable for any decisions you make regarding any information provided in these
reports. Investing, trading and speculation in any financial markets may involve
high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and
affiliates as well as members of their families may have a short or long
position in any securities, including those mentioned in any of the reports or
essays, and may make additional purchases and/or sales of those securities
without notice.
|