I’m on record for a quite bullish call in gold one year ago. As of today, gold trades approximately 20 % or 300 USD higher.
— Adrian (@highlevelTrader) February 9, 2019
In March 2019, I also tweeted that the silver/gold ratio probably made a low and that I expect silver to at least reach 20 USD in 2019. I was slightly too optimistic, silver made “only” 30 % and hit 19.75 USD.
— Adrian (@highlevelTrader) March 5, 2019
I have a new strong opinion I would like to share with you.
- Silver is a precious metal with approximately 50 % of the demand coming from industrial uses. It is a “high beta” play on the gold price, more sensitive to global growth and the inflation expectations.
- The relationship to gold in more detail: at the beginning of a new up cycle in precious metals, silver in general lags gold. Later in the cycle (especially at the end of a certain cycle) silver massively outperforms gold. After the peak, silver starts to underperform again.
After spending quite some time doing research, today’s situation in silver looks similar like late 2003 (blue arrow). But here are my observations:
- “History doesn’t repeat itself, but it often rhymes.” – Mark Twain
- The a-b-c is a typical bottoming process, with a retest of the lows (c), a price compression and a well-defined breakout (blue trendline). During this initial stage, silver rather underperforms gold (see 1 and 2 in the silver/gold ratio).
- Later silver consolidates above the 200-week moving average (blue box), pullbacks finding support at the moving average, exactly like in 2003. Meanwhile, the moving average flattens and even turned upward.
- The silver/gold ratio also put in a possible bottom and is close to breaking the dashed blue trendline (yellow box).
- If things repeat in a similar way, expect a huge up move in silver soon. A repeat of 2003-2004 would imply roughly 50 % upside within this year.
How I play it:
- I already have a position in silver, I will increase the position if silver is able to break and hold above 18.12 USD = higher low. (further confirmation if gold miners break out and the silver/gold ratio breaks the downward sloping trendline)
- Below 17.48 USD I reduce my position and stay rather defensive until silver is showing strength again.
- I personally use futures and I will probably add a call option (strike 18 USD; March 2021). For most people, a ETF like SLV is probably a good way to participate.
A word of caution:
- First, bold predictions often fail. The above mentioned is just my opinion (as of today).
- Further, history is only a guide. The move may take place later, is not as explosive as in 2003-2004 or will not take place at all.
- I see a possibility that the recent virus in China has a quite negative impact on global growth and on inflation expectations (S&P500 doesn’t believe it, but copper and oil do). A severe outcome would probably delay this trade setup. Remember, silver is very sensitive to inflation expectations.
- As already stated, just my opinion and not investment advice. Please do your own analysis. Investing/trading involves substantial risk of loss and is not suitable for all people.
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