DEAR Investors
It has been a long time since I traded commodities, or rather since I last discussed them. That must have been couple of years ago when I took a trade in both gold and silver as a spread, playing the price ratio of these metals. Obviously, those markets were nowhere near the levels of today, with the gold at all time high and silver at the highest level in 30 years, when it set the modern era record high. Currently at just above $40 per ounce it is flirting with that mark, and climbing fast.
Many market observers speculate that this high of a price qualifies to be called a “bubble”, one that is ready to burst, in which event the silver would crash from its current lofty levels. On the other extreme, there are people calling for silver to reach well above $100 per ounce. For right now silver is certainly in a well advanced bull market, but is it a bubble at this point? Let’s compare it to previous market bubbles.
Here is an overlay of the current rally and the silver bubble in 1980. Based on price increases from the start of both these bull markets, so far we have not achieved the level of advance seen back then, Of course, the starting points for both of them are at different levels. The low for the rally 30 years ago was at 1.3150, set way back in 1971. Since the market never visited those levels again, the beginning point for the present bull market was at $4.0570, which greatly effects the size of appreciation in percentages. Obviously, silver does not have to gain as many percentage points as before but this overlay also shows that the bull in 1980 had one more extreme advance before the price collapsed. More on that later. For now the present rally is not quite as dramatic as the previous one. Yet, that is.
Using the word “bubble” implies that a market experiencing one will crash. Here is another comparison to previous bubbles. Since silver is a commodity, it should be compared other commodities and not to currencies or stocks. The graph above shows both current silver and gold overlayed with well-known spectacular bull markets in commodities. What I find most interesting about this chart, is how historically short the current silver, and gold, have been so far. If past is any indication of the future, we could see a good size sell off in silver followed by another multi months, or years, rally pushing it some ridiculous new highs.
Because most bubbles burst suddenly, without building elaborate reversal formation, they typically form blow out tops. Given the length of the rally in silver, one should probably look for a blow out using the weekly chart, rather then the daily. Not a fast rule, but it seems in place here. To date, this chart has some characteristics of a blowout top- parabolic, almost unsustainable, price and increased speed of advance. It is also lacking two most important factors – extreme volatility and a strong reversal candlestick pattern. By extreme volatility I mean the largest single candlestick in the rally, which here could be in a $5, $7 or even $10 range, while a strong reversal candlestick pattern should be a single bearish candle like a hanging man, shooting star or an engulfing line.
That could easily take a few more (2-4?) periods, which, given the time frame used here means weeks. The silver market is certainly in an advanced stages of a bull market, and might reverse relatively soon, presenting a great shorting opportunity for as much as $10-20 move. As far as the status of current behavior as a “bubble”, that will be determined once we see the nature and ferocity of correction(reversal), when it comes. Should not be much longer.
NEXT WEEK WE WILL SEE DOLLAR VS SILVER>
WARM REGARDS
Devendra Pandit
Owner
WEALTHPRENEURS Advisory services.
XXXXXX9503
It has been a long time since I traded commodities, or rather since I last discussed them. That must have been couple of years ago when I took a trade in both gold and silver as a spread, playing the price ratio of these metals. Obviously, those markets were nowhere near the levels of today, with the gold at all time high and silver at the highest level in 30 years, when it set the modern era record high. Currently at just above $40 per ounce it is flirting with that mark, and climbing fast.
Many market observers speculate that this high of a price qualifies to be called a “bubble”, one that is ready to burst, in which event the silver would crash from its current lofty levels. On the other extreme, there are people calling for silver to reach well above $100 per ounce. For right now silver is certainly in a well advanced bull market, but is it a bubble at this point? Let’s compare it to previous market bubbles.
Here is an overlay of the current rally and the silver bubble in 1980. Based on price increases from the start of both these bull markets, so far we have not achieved the level of advance seen back then, Of course, the starting points for both of them are at different levels. The low for the rally 30 years ago was at 1.3150, set way back in 1971. Since the market never visited those levels again, the beginning point for the present bull market was at $4.0570, which greatly effects the size of appreciation in percentages. Obviously, silver does not have to gain as many percentage points as before but this overlay also shows that the bull in 1980 had one more extreme advance before the price collapsed. More on that later. For now the present rally is not quite as dramatic as the previous one. Yet, that is.
Using the word “bubble” implies that a market experiencing one will crash. Here is another comparison to previous bubbles. Since silver is a commodity, it should be compared other commodities and not to currencies or stocks. The graph above shows both current silver and gold overlayed with well-known spectacular bull markets in commodities. What I find most interesting about this chart, is how historically short the current silver, and gold, have been so far. If past is any indication of the future, we could see a good size sell off in silver followed by another multi months, or years, rally pushing it some ridiculous new highs.
Because most bubbles burst suddenly, without building elaborate reversal formation, they typically form blow out tops. Given the length of the rally in silver, one should probably look for a blow out using the weekly chart, rather then the daily. Not a fast rule, but it seems in place here. To date, this chart has some characteristics of a blowout top- parabolic, almost unsustainable, price and increased speed of advance. It is also lacking two most important factors – extreme volatility and a strong reversal candlestick pattern. By extreme volatility I mean the largest single candlestick in the rally, which here could be in a $5, $7 or even $10 range, while a strong reversal candlestick pattern should be a single bearish candle like a hanging man, shooting star or an engulfing line.
That could easily take a few more (2-4?) periods, which, given the time frame used here means weeks. The silver market is certainly in an advanced stages of a bull market, and might reverse relatively soon, presenting a great shorting opportunity for as much as $10-20 move. As far as the status of current behavior as a “bubble”, that will be determined once we see the nature and ferocity of correction(reversal), when it comes. Should not be much longer.
NEXT WEEK WE WILL SEE DOLLAR VS SILVER>
WARM REGARDS
Devendra Pandit
Owner
WEALTHPRENEURS Advisory services.
XXXXXX9503
No comments:
Post a Comment