Silver Prices – The Truth of What the Future Holds

  • Commodities Analysis
  • Editors Pick

Silver and gold prices held firm near a two-week high on Friday, heading for their biggest weekly gains in more than two months after the U.S. Federal Reserve cemented investors hopes that interest rates are going to stay low for some time.

Fed Chair Jerome Powell on Wednesday said the U.S. job market still had some ground to cover before it would be time to pull back support and that it was “ways away” from considering interest rate hikes. Dovish remarks by the U.S. central bank and underwhelming economic data pushed the dollar to a one-month low and on track for its biggest down week since May, making gold more appealing for other currency holders. As the realization that the Fed is unlikely to tighten its policies anytime soon sinks in, the outlook for the U.S. dollar turns into bearish territory. As the U.S. dollar risk currently lies to the downside, the precious metals could continue to find support in the short term.

The current level of economic activity is highly dependent on continued fiscal and monetary stimulus. As COVID pandemic-related support begins to decline, disappointing housing, retail sales and employment data show the economy is losing steam. There is ample reason to think that a slowdown could become a downturn in the absence of renewed fiscal support.

A significant slowdown lies ahead. Should one materialize, calls for renewed fiscal and monetary support will not go unheeded. Fiscal stimulus and high deficits that require Fed balance sheet expansion are permanent. Chances that the economy can go cold turkey from incremental government support are minuscule, in our opinion. For this reason, inflation is likely here to stay.

A frustrating year thus far for silver prices

It has been a challenging and frustrating year thus far for COMEX silver. Inflation is raging while interest rates are falling, yet COMEX silver prices are down year-to-date. This has left many silver investors wondering: Is there still hope for a renewed rally, or has all of this become a lost cause?

Things have been particularly challenging as of late. Before the June FOMC meeting, COMEX silver was up on the year and trading near $28. After the meeting, it fell into a four-week range where the price seemed trapped between $26.00 and $26.50. And now, after a sharp selloff over the past few days, the price is barely holding above $25.00. That places prices down about 5% year-to-date.

But I’m not going to complain too much today as I’m just glad we’re still holding above $25. That may not sound like much, but in the grand scheme of things, it’s more important than it may seem. Why? Because even though we’re all frustrated by the lack of follow-through so far this year, the proper way to view the long-term chart is through the lens of consolidation.

After spending SEVEN YEARS trapped between $14 and $18, COMEX Digital Silver finally surged from $20 to $30 in just THREE WEEKS last year. That quick move has led to what is now a consolidation phase as the “market” digests and recalibrates to a new price range that is more than 50% above the previous range. Again, that previous range persisted for over seven years! That’s a long time for producers, suppliers, users, and investors to get accustomed to low and stable prices.

And now, after that three-week surge in late July and early August 2020, the silver world is still adjusting to a new price range that is over 50% higher than the 2013-2019 time period. It takes a while for that to sink in, and price must persist at these higher levels for it to become the “new normal” across the supply/demand chain.

So, in this light, perhaps this year’s frustrating grind sideways is more understandable? Please understand, I’m not willing to forgive or ignore the role that The Banks and the CFTC play in allowing the manipulation to persist. However, if we look at the past ten years on a weekly chart, we see a clear breakout and a flag/consolidation. That flag is a range bounded by $22 at the bottom and $28 at the top. What is the median or middle? $25. And that’s why holding above $25 is so important to me.Silver Weekly Candlestick Chart

Putting this all together, let’s answer the question posed in the first paragraph. Is there still hope for a renewed rally, or is silver a lost cause? The analysis and chart above should make it clearer.

A rally in COMEX silver above $28—where price closes two weeks in a row above this key level—will constitute an upward breakout. This will lead to a move to $30, and once above there, $34 and higher.

A drop in COMEX silver below $22—where the price closes two weeks in a row below this key level—will constitute a breakdown. This will lead to more selling and a likely continued fall to $20 or even lower.

Until then, the price remains rangebound in this new normal, averaging around $25 per ounce. We’ll keep watch—and you should, too—for any signs that price is moving up and onward or down and out. As usual, I hope for all of us that it’s former and not the latter. – Sprottmoney

Reasoning About Silver

We’re seeing the argument, again, that silver stocks are being consumed in solar panels, medical applications, and of course, electronics. This argument has a certain temptation. After all, the standard assumption is that value is inversely proportional to quantity. Purchasing power is widely believed to be 1 / N (N is the number of units of currency issued). So, logically, if stocks are decreasing, then silver is becoming scarcer, and they deduce that it is becoming more valuable.

This is a good example of Motivated Reasoning, that is the “tendency to find arguments in favor of conclusions we want to believe…”

Is Silver being Demonetized?

Something needs to be said upfront. And it is obvious to even casual observers. The dollar has (by far) the greatest quantity, and yet far from the least purchasing power. It is one of the strongest currencies, despite—or perhaps because of—this fact.

Also, as a corollary, the price of silver measured in dollars does not go up as a function of increases in the quantity of dollars. Therefore, the logic of silver becoming more valuable strictly on account of its decreasing quantity is broken.

More importantly, this argument argues that silver is being demonetized. It is saying that the commodity formerly known as “money” is being put into consumer goods and, eventually, landfills. That is, people are disposing of the stocks of money accumulated over 5,000 years of human action.

If you were trying to build a bullish case for silver, based on its expected role in a new monetary system, this argument would undermine that case. Either silver will likely play a role, and hence buying it now is a non-expiring call option on this expected monetary change. Or else silver is being thrown away, forgotten and unlamented. Take your pick, one or the other.

Some people who tout this kind of argument don’t give a sh*t about the future of the monetary system. They are either in the game for a quick trade, to make what they deem to be real money—i.e. dollars. Or else they are silver spruikers, trying to get you to buy silver, from which they may benefit.

But many are sincere. They come to silver (and gold) because the dollar is obviously, visibly, failing (though not via skyrocketing consumer prices). Interest has all but been euthanized, along with savers, retirees, pension funds, and insurers. The dollar’s managers are taking more and more extreme actions to try to stave off catastrophe, while at the same time loudly proclaiming that there’s nothing wrong, the economy is fine, nothing to see here, move along folks.

So these folks buy silver, thinking about monetary change. But a funny thing happens on the way to said monetary change. SILVER IS GOING UP! It’s easy to lose sight of where things are headed, and why we took what might have been an inconceivable action before 2008—buying silver—because the price action is exciting. And if you time it right, you can get free dollars which can buy real food, real housing, and real Ferraris.

We certainly don’t fault people for trading silver. Speculating for price gain is the surrogate for the yield which has been killed by the Fed (Monetary Metals pays a yield on gold and silver). Our quibble is when they make arguments that undermine the whole Purpose of the precious metals movement: that the monetary metals are money.

Understanding Central Banks Buying and Selling of Gold

Another argument, this one is coming up for gold again, is that Central Bank X bought X tons of gold in June. The implication is that this is bullish. We aren’t sure if those arguing this are trying to make you believe that central bankers are smarter than everyone else, and therefore you should follow them in placing your bets. We can say with confidence, however: they aren’t smarter.

More often, those who argue this way are trying a variant of the scarcity argument. In other words, the central banks just took X tons of gold off the market, therefore the price should rise.

It should be obvious that central banks can just as easily sell what they bought. So this is not necessarily taking gold off the market.

Our main point about this is, perhaps, less obvious. The quantity of gold does not change in a transaction. If a central bank bought X tons of gold, then someone sold X tons of gold. We ask the rhetorical question, why do these gold commentators never write headlines like this: “Thousands of Random People Dump X Tons of Gold Onto Hapless Central Bank”?

Some transactions are correctly characterized as a motivated buyer buying gold off a gold owner. Others are correctly described as a motivated owner selling it to another party. What factor determines which is correct? That factor is not: whichever party is more famous.

That factor is the price action. If a buyer is motivated, he lifts the seller’s offer. The offer price ticks up. Conversely, if a seller is motivated, he presses the buyer’s bid. The bid price ticks down.

What do we know about this central bank action in June? We know the price was falling during the month. Therefore, the latter is true. Sellers dumped their gold onto the central bank bid.

Monetary Metals is the exclusive publisher of supply and demand fundamentals and dozens of other charts of market data, that helps traders cut through the noise to understand what’s really going on. We don’t believe that misinformation makes any difference to the price, other than in the shortest time horizon. If anything, it causes the price to be depressed over the longer term as it may cause many people to give up on owning precious metals.

Supply and Demand Fundamentals for the Gold Price

Here is the gold chart, zoomed in to show 60 days of the near contract.

Gold Chart

We have marked it up to show different patterns in different periods. In (1), we see a very large increase in the price of the dollar (we argue at length, that measuring the dollar in terms of gold and not measuring gold in terms of the dollar, is no mere tendentious point, but the only way to see gold and the dollar clearly). A rising price of the dollar in gold terms means a drop in the price of gold measured in dollars. As this price move occurred, gold became somewhat scarcer. Our measure of scarcity, the cobasis, rose from around -0.70% to -0.44%.

Next, in the region (2), the price of the dollar is sideways to down. But the scarcity of gold continues to rise. At the end of this phase, there’s another sizeable blip up in the dollar, with a smaller but noticeable blip up in gold’s scarcity.

In (3), the price of the dollar drops about half as much as it had gained. Technical chartists may read meaning into such a 50% retracement, but that is not our focus. We are just looking at the fact that gold became less scarce during this price move (this was also about a 50% retracement).

It is notable that the proportionality is holding. This means that the price moves are largely driven by leveraged speculators who are positioning and repositioning themselves based on their expectations of the next price move, plus their increasing or decreasing access to credit, margin calls on other assets, etc.

But this week, something changed. Look at the point labeled (4) on Monday, though this pattern continued on Wednesday. We see the dollar went up (i.e. the price of gold went down) but the scarcity of the gold market went down. Gold became more abundant in the market when its price dropped.

This is the selling of bars and coins, not futures. Not what you want to see, if you’re making a bullish bet on the price of gold.

Now let’s look at silver.

Supply and Demand Fundamentals for the Silver Price

Silver Chart

The price action of silver is similar to gold. But the basis action is a bit different. The cobasis moves along with the price. There is even a day (July 5) when the cobasis moves up—silver became scarcer—when the dollar went down. That shows buying of coins and bars.

So let’s look at a chart we don’t include in this Report very often (though it is updated on our website every day). This one shows the ratio of the gold basis to the silver basis, and the gold cobasis to the silver cobasis. In other words, it shows which precious metal is relatively more abundant or scarce. And the trend.

This chart is zoomed out to show the start of the covid lockdown through the present.

Gold/Silver Basis Ratio Chart

As we have discussed before, the spreads went wild in the immediate aftermath of lockdown. They have been in a process of converging to whatever the new normal is (as we showed last time, the bid-ask spreads are wider than before).

Since June 11, the ratios have been moving in favor of silver. That is, the ratio of the gold cobasis to the silver cobasis is falling, and the ratio of their bases is rising. This means that, relative to gold, silver is becoming less abundant and more scarce. Notably, during this time, the gold-silver price ratio rose 5 points. – Monetary Metals

Which of the two will have an Explosive Price Rally & which will have a Sustained One?

This special Gold and Silver research article will help you learn what to expect over the next 24+ months and where opportunities exist in Gold and Silver trends.

LONGER-TERM SUPPORT IN GOLD IS LIKELY TO ACT AS AN UPWARD SLOPING PRICE FLOOR OVER THE NEXT 24+ MONTHS

There are two key upward sloping trend lines we want to focus your attention on, on this Monthly Gold chart, below. The first, the YELLOW trend line, originates from the 2009 bottom from the Housing Crisis. The important thing to remember at this time was that the US markets were in the midst of a broad market Depreciation Cycle that started in 2001-02 and ended in 2010. The rally that was taking place before the 2000 Depreciation Cycle started was a reactionary upside price trend resulting from the end of the DOTCOM bubble and the post 911 terrorist attacks. The US entered a war that pushed fear levels higher – resulting in a transitional shift in how Gold was perceived at that time.

The YELLOW trend line acts as key market support resulting in a Wave 1 & Wave 2 setup. Gold is currently rallying into a Wave 3 rally phase which my team and I believe will prompt two unique rally peaks over the next 24+months. The first with a high price near $2400 and a second with a high price near $2775. The first upward price wave will likely peak near the end of 2021 or in early 2022 and the second upward price wave will likely peak near Q3/Q4 of 2022.

The second upward sloping price trend line is more aggressively trending and will likely act as an immediate price floor over the next 24+ months. In other words, we expect this more aggressive CYAN trend line to continue to act as an immediate price support level pushing the next two price waves upward to our targets levels.

I’ve drawn the two expected upward price waves on this chart in GREEN Arrows. Remember, this is a Monthly Gold price chart, so each of these price waves represents 4 to 6+ months of time.

Gold Futures Monthly Chart

GOLD QUARTERLY ADAPTIVE DYNAMIC LEARNING CHART – LOOKING FOR $2500+

Our proprietary Adaptive Dynamic Learning price modeling system is showing a very clear upward arcing price advance in Gold on this Quarterly chart. It is clear to see Gold should rally into the end of 2021, reaching highs above $2100~2200 before the start of 2022, then continue to rally above $2200 into 2022. At this point, Gold will likely attempt a rally above $2400 before stalling out between $2400~$2500 near the end of 2022. This next downward price correction, after the peak, will attempt to retest the YELLOW support channel on this chart – which is very similar to the CYAN price trend line on the chart above.

The next secondary peak in Gold will likely happen in 2023. The condensed nature of this second price rally in Gold suggests the peak near $2400 may complete a minor upward wave, part of the broader upward Wave 3 structure setting up now, and prompt a minor retracement to levels near $1900 before moving higher after 2023. So, Gold traders have two to four really nice price trends setting up over the next 24+ months.

Gold Futures Quarterly Chart

SILVER QUARTERLY ADAPTIVE DYNAMIC LEARNING CHART – LOOKING FOR $50+

This Silver ADL Monthly price chart highlights a very big trend that is setting up where Silver prices may rally above $40 to $50 near the end of 2021 or in early 2022 before moving into a sideways price consolidation phase – eventually settling near $30 to $35 in 2023~24.

What we find interesting about this ADL predictive chart is that Silver has continued to advance faster than gold over quite an extended period of time and is actually holding up a momentum/base level better than Gold over the past 8+ months. It is our belief that Silver will start to rally above $35 in Q3/Q4 2021 and may target levels above $40 before the end of 2021. The peak in Silver may happen near the end of 2021 or in early 2022, and we want to warn you that a peak level above $50 is very possibly on a washout peak type of rally.

Eventually, though, Silver will retrace back to levels near $30 to $35 and settled into another sideways price trend near the end of 2022 and throughout 2023. So, this presents another extended sideways price channel phase where Silver traders can load up on Silver while it settles into this channel before the next big rally phase.

Silver Futures Quarterly Chart

The lack of secondary price rally in Silver, as we saw in the ADL data for Gold, suggests the secondary Gold rally phase may be very short-lived and condensed.

Either way, my team and I believe the precious metals sector is primed and ready for this next upward price trend. To help you understand the timing of these events, the bit breakout rally in Silver does not start until near the end of 2021 and carries into Q1/Q2 of 2022. The big rally in Gold will likely start in Q3/Q4 2021 and last throughout 2022 and into Q1/Q2 2023. So, based on the ADL price modeling system’s suggestions, Silver may enter an explosive price rally phase – overshooting true market boundaries, while Gold enters a more sustained and realistic price rally to levels above $2200 over the next 6 to 8+ months. Silver will peak and begin to consolidate lower while Gold holds above $2000 and continues to trend moderately higher in two separate advancing phases.

Remember, our Appreciation/Depreciation cycle phase research suggests the new Depreciation cycle phase started in 2019 and will last until 2027~2028. That means Silver and Gold will likely continue to experience multiple upward price cycle phases (advances) well into 2029~2030 before finding an ultimate peak level. We still have a long way to go before this rally in precious metals peaks. More than ever, right now, traders need to move away from risk functions and start using common sense. There will still be endless opportunities for profits from these extended price rotations, but the volatility and leverage factors will increase risk levels for traders that are not prepared or don’t have solid strategies. Don’t let yourself get caught in these next cycle phases unprepared. – Sprottmoney

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