So after falling 23% in just under 6 weeks, silver bottomed out Mon morning and rallied ever since, gaining 6.2% on the week to close at a still very low $13.43, up from a low of $12.50 early Monday. Check the chart below to see the 6 month picture. For a 10 year view, click this link. A rather steep uptrend from the Fall 08 lows to the April $12 lows was broken on this latest sell-off, but in the big picture, it looks like the uptrend since those ridiculous lows ($8.75) 9 months ago is very much in tact technically.
As for the fundamentals, I’ll just point out the following: In Mar 08 after Bear Stearns went under, silver was $20/oz. Since then, just multiply the Bear debacle by 50 to get a picture of what’s happened since. Meanwhile, most betting men would have assumed continued strength in the shiny white metal given the financial situation, but rather, it is down over 30% almost 18 months later. Seemingly on sale…
From under 61 on June 2nd, the ratio shot up to 72 a week ago, before finally retreating back under 70 by Friday 7/17. This 20% rally in the ratio certainly surprised me, and I expect it to at least fall to the mid-low 60s, if not much lower over the long haul.
Geologists estimate silver to gold inside the earth’s crust is 17.5 to 1. Let’s be conservative and double that to 34. Now consider above ground stockpiles. Silver stockpiles have been drained greatly the last 40 – 50 years, while almost all new gold that is mined is still around somewhere – on a neck, in a vault, etc… Silver is a crucial metal in technology, which is why the stocks have been drained lately. Gold is still basically for investment and jewelry.
So take that 34 ratio, and drop it to 30 to account for the usage situation with the two metals. Silver would have to jump 132% to be fairly priced at a 30:1 ratio, and even that price of $31.25/oz. is way too low, looking at these extremely conservative assumptions. Of course, in 1980/81 the ratio fell under 20 and bottomed out at 16.
The other markets have been truly volatile since Memorial Day. The 10 yr bond yield alone has had weeks of +11.2%, -7.4%, -6.0%, and finally up 10.9% for the week just ended. The S&P rallied 6.9% last week, while oil finally bounced from its rather brutal 20% correction from its 6/11 highs of $73. Black gold bounced 5.8% last week, finding support just under $60.
Amazingly, the crucial market in all of this, the dollar, has been the least volatile of them all. Since Memorial Day it’s never closed above 81, while only once closing under 79 (6/2).
I suspect that this consolidation will eventually break to the downside. There are just way too many fundamental factors that are weighing on our currency right now. The heaviest two are the many new Chinese Yuan currency swap agreements, and US Treasury issuance.
Markets in total this week:
Oil – Up 5.8% to $63.34, finally bouncing from recent 20% drop.
S&P 500 – launched 6.9% this week to close at 940. Reflation/inflation? After all, everyone’s pretty wise to the Green Shoots b/s con game by now – it’s not rallying on economic health. And don’t give me the bank profits as proof of brighter days ahead.
Silver – + 6.2% to $13.43. Ratio drops from 72 to 69.8.
Gold – + 2.8% to $937.7
Govt 10 Yr Bond – Yield jumps from 3.29 to 3.65 this week, up 10.9%!!
Govt 30 Yr Bond – Up a strong 7.9% to 4.53 from 4.20.
$Dollar$ Index – Down just .8% to 79.49. If it closes for a couple days in the 78’s, then drifts below…get out of the way.