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Indicators Suggest Silver Headed for Single Digits

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Quantitative evidence suggests that the recent action in silver is no mere correction but rather the opening salvo of a secular bear market.

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Silver's purchasing power has declined by a third in two weeks. Dozens of articles have euphemistically described silver as being in a "correction." Silver is in a bear market. The only debate is how low will it go and how long it will last. The last two articles in this "coming commodity crash" series examined a couple of indicators which had bearish overtones for silver. This article will present even more evidence which suggests that silver is headed considerably lower from the present levels.

Big Move Up, Big Move Down

Let's start from the top. As of the April 27, 2011 close, silver had gone up 435% over the previous 628 trading days (2.5 years). Since 1920 (where daily data from chartsrus.com starts) this has actually occurred on 56 prior occasions. In all 56 prior instances, silver experienced an 85.84% decline from the signal date. This would project the price of silver to go to $6.86.

Silver Crashes Lead to More Downside

On May 5, 2011 Bespokeinvest.com listed the dates of top 10 four-day declines in silver. The four-day decline up to May 5 made the list at No. 5. If one takes their research further and looks at what happened next after top four readings, all had 77% declines AFTER the massive 29% to 40% four day declines. This would project to silver going to $7.73.

Of the top 10 largest four day declines in silver, six of them were in the first quarter of 1980. That was, of course, the quarter of the great silver top. Another time was December 1980. Silver went down over 60% in the next year and a half. The two other times were in 1983 two weeks after the top of a massive bear market rally. Silver would not see that 1983 high again for another 24.5 years.

So in other words, almost all the silver CRASHES (except Dec. 1980 when silver was in the middle of a long decline) were after major PEAKS. Like the current situation. The most interesting of them all was the one in January 1980 which was the exact peak. Like the current situation. All nine prior instances had at least 8.9 years before the ultimate bottom in silver. This would tie into another article on silver (Indicator Suggests No New Silver Yearly Closing Highs Until 2034) which suggested this bear market would last at least eight years.

Silver Radically Outperforming Gold

Another article in this series (Silver Most Overbought Since at Least 1712) suggested silver was the most overbought since at least 1712. Only one data point was used per year to give a sense that a major top was forming which would rival the great silver tops over the past few centuries. The methodology used was a derivative of the gold/silver ratio. For this article, instead of looking at annual numbers, we will zoom in closer on the daily gold/silver ratio.

The indicator concerns itself with is how much the gold/silver moving average is trading above its current ratio. The concept here is that silver is more speculative than gold. One can argue that silver is the "poor man's gold" and attracts the retail investor who is the last to come in not too far from the top. Whatever the reason why the indicator works, it seems to do a good job. The prior article basically looked at this indicator for each year as of December 31. The reason why that date was chosen was because the average price for each year was readily available all the way back to 1712. However, in the current study, we will sacrifice a bit of robustness (daily data starts in 1920) for a more precise pinpoint top call during the year.

First of all, the indicator's all-time extreme readings occurred in 1933/1934. As most are aware that was during a time period when precious metal pricing was rather heavily influenced by F.D.R. and his companions. For those interested, you can read all about that here. For the rest of you, from Jan 2, 1934 to this year, the all-time high in this indicator was on January 10, 1980. This is noteworthy because silver peaked 11 calendar days later. From the Jan 10, 1980 signal date to its subsequent low, silver went down 89.9%.

Well this daily indicator record stood for over 31 years until April 20, 2011 when it finally was broken. Interestingly enough, silver put in its multi-decade high eight calendar days later. If silver would follow a similar pattern, it would go down to $4.56.

One final warning: This indicator was NOT anywhere near this extreme at prior silver highs over the last decade. In other words, the indicator is not acting like it was during the 2004, 2006 or even 2008 tops. Back then silver was outperforming gold by a bit, but nothing remotely like it has been over the last year. The only time where we saw this kind of silver outperformance was back at January 1980.

Single-Digit Silver

In conclusion, quantitative evidence suggests that the recent action in silver is no mere correction but rather the opening salvo of a secular bear market which will see silver back in the single digits. It is difficult to overemphasize how risky silver is at this point in time. All rebuttals to the carefully stated facts set forth in these articles (i.e. the Fed is printing money) are all derivations of one main counterargument: This time it's different.
Position in Silver.
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