An objective and reasonable estimate for the price of silver at the next intermediate peak (estimating 2013 – Quarter 2) is $50 to $60 per ounce (current price is about $28).
This is not a prediction based on wishful thinking and hope, but a best
estimate based on rational analysis of data stretching back to 1975.
The actual price for silver at its next peak could be higher or lower,
and the peak might be earlier or later, but this price range and
approximate time is, by this analysis, the most probable.
Analysis
The actual analysis is complex, so I encourage you to focus on the conclusion above. But if technical analysis is interesting to you, please continue reading.
Until the last century, silver and gold had been money for thousands of years. During the long history of gold and silver, the price ratio of gold to silver has averaged, depending on analysis, around 15 to 20. Since 1975, it has been as low as 17 and as high as about 102. The ratio is low when silver is expensive compared to gold – which occurs at peaks in the price of silver, such as in early 1980. Silver is a smaller market and much more volatile in price than gold, so the ratio can stretch one way or the other depending on the degree of speculative fervor in the market or the degree of price depression and disinterest in precious metals, such as in 1991. Extremes in the ratio usually occur at highs and lows in the prices of both metals.
How is this useful? Instead of working with the gold to silver ratio, invert it and use the silver to gold ratio. That ratio peaks with price peaks in silver and bottoms with price bottoms in silver. However, there is no simple answer as to what ratio is “high” or “low” since the ratio might be very different between the decade of the 1970s and the 1990s. There is, however, a technical indicator called the Relative Strength Index that is normalized between 0 and 100. The RSI can be used with any time scale, such as 5 minute price data, or 50 month data. The result is the same, a number between 0 and 100, with low numbers (such as 14) indicating a severely “oversold” condition and high numbers (such as 80) indicating a severely “overbought” condition.
For example, suppose silver (SI) has been rising for weeks, more rapidly than gold (GC), to a price of $40 while gold has risen to $1,600. The gold/silver ratio is 40 and the silver/gold ratio is 0.025. If we calculate the RSI of the SI/GC ratio using, say 21 weeks as the time period, the RSI formula might return a number of 78. This is a high number, particularly for a RSI of 21 weeks. This indicates that the SI/GC ratio is quite high and likely due for a fall, with silver falling much more rapidly than gold.
Sounds easy, doesn’t it? The problem is that the silver market, while overbought, could rally further and become even more overbought, and the RSI of the ratio might rise even higher, say to 85, while the price of silver jumps even higher. If you had sold silver (when the RSI was 78), you missed some profit, and if you sold short, you incurred some losses. This is the dilemma of all traders: when to buy and when to sell. (Few people can buy at the lows and sell at the tops, so they need other tools to help time their trades.) I don’t know of any simple and fool-proof answer.
What I do know is that we can delve deeper into the above SI/GC ratio analysis and come to some high probability predictions that will give us a reasonable degree of safety and security in our quest to buy low and sell high.
The Deviant Investor
Analysis
The actual analysis is complex, so I encourage you to focus on the conclusion above. But if technical analysis is interesting to you, please continue reading.
Until the last century, silver and gold had been money for thousands of years. During the long history of gold and silver, the price ratio of gold to silver has averaged, depending on analysis, around 15 to 20. Since 1975, it has been as low as 17 and as high as about 102. The ratio is low when silver is expensive compared to gold – which occurs at peaks in the price of silver, such as in early 1980. Silver is a smaller market and much more volatile in price than gold, so the ratio can stretch one way or the other depending on the degree of speculative fervor in the market or the degree of price depression and disinterest in precious metals, such as in 1991. Extremes in the ratio usually occur at highs and lows in the prices of both metals.
How is this useful? Instead of working with the gold to silver ratio, invert it and use the silver to gold ratio. That ratio peaks with price peaks in silver and bottoms with price bottoms in silver. However, there is no simple answer as to what ratio is “high” or “low” since the ratio might be very different between the decade of the 1970s and the 1990s. There is, however, a technical indicator called the Relative Strength Index that is normalized between 0 and 100. The RSI can be used with any time scale, such as 5 minute price data, or 50 month data. The result is the same, a number between 0 and 100, with low numbers (such as 14) indicating a severely “oversold” condition and high numbers (such as 80) indicating a severely “overbought” condition.
For example, suppose silver (SI) has been rising for weeks, more rapidly than gold (GC), to a price of $40 while gold has risen to $1,600. The gold/silver ratio is 40 and the silver/gold ratio is 0.025. If we calculate the RSI of the SI/GC ratio using, say 21 weeks as the time period, the RSI formula might return a number of 78. This is a high number, particularly for a RSI of 21 weeks. This indicates that the SI/GC ratio is quite high and likely due for a fall, with silver falling much more rapidly than gold.
Sounds easy, doesn’t it? The problem is that the silver market, while overbought, could rally further and become even more overbought, and the RSI of the ratio might rise even higher, say to 85, while the price of silver jumps even higher. If you had sold silver (when the RSI was 78), you missed some profit, and if you sold short, you incurred some losses. This is the dilemma of all traders: when to buy and when to sell. (Few people can buy at the lows and sell at the tops, so they need other tools to help time their trades.) I don’t know of any simple and fool-proof answer.
What I do know is that we can delve deeper into the above SI/GC ratio analysis and come to some high probability predictions that will give us a reasonable degree of safety and security in our quest to buy low and sell high.
- Run the same Relative Strength Analysis for the SI/GC ratio, but use a longer time scale – like 40 weeks. Further, average the 40 week RSI numbers over a centered 11 week period, using the current week’s number plus the 5 weeks both before and after the current week. The result is a smoothed RSI that is centered about the relevant week in the analysis. (Clearly the last few weeks in the series are not using the future RSI values.) This removes much of the short term “noise” – the weekly fluctuations that mean nothing in the long term.
- Calculate the 65 week simple moving average (add the prices for the last 65 weeks and divide by 65) of the actual silver prices. This produces a long term trend for silver prices that has removed all but major fluctuations in price.
- Calculate the 7 week simple moving average of the actual silver prices. This gives a short term average that is much more volatile than the 65 week moving average.
- Subtract the 65 week average from the 7 week average. Then divide by the 65 week average. This produces a percentage above or below the long term trend of the 65 week moving average for silver. This is important because it measures a deviation from average in percentage terms, but not in actual silver prices, which have varied over the past 12 years from $4.01 per ounce to nearly $50 per ounce. Further, it relates the percentage (over or under) to a long term moving average, which accounts for both bear and bull markets in silver prices.
- Graph the 40 week (centered) RSI of the SI/GC ratio against the percentage that the 7 week moving average of prices is above or below the 65 week moving average of prices (percentage of price deviation or PPD). The graphs of both are similar as to direction, highs, and lows. In fact the correlation since 1975 is 0.69 and since 1/1/2002 (silver bull market) is 0.85, a high degree of correlation.
- Examine the graphs of both the RSI and the percentage of price deviation. You will find that major lows in the RSI and percentage price deviation (PPD) occur approximately every 2 years, and similarly, highs occur about every 2 years, but the timing is not consistent enough that you would trade on these cycles. A chart since 1975 will not display well due to the amount of data. However, the following chart (data since 2004 is more manageable) shows the correlation between the RSI of the SI/GC ratio and the percentage of price deviation in silver.
- Further, you will see that peaks in the RSI and the PPD occur between 35 and 50 weeks after their lows and that the PPD peaks rise to an average (since 1/1/2000) of about 40%. This means that the 7 week moving average, less the 65 week moving average of price, divided by the 65 week moving average of price, peaks around 40% – perhaps 30% some years and perhaps 65% other years.
- The bottoms in the RSI, after being smoothed so much, are always at or near (on a weekly scale) important bottoms in price, which occur approximately every two years.
- Finally, note that an important bottom in the RSI occurred a few months ago and that it was the second most oversold bottom in the past 12 years.
- Putting this all together, we conclude:
- An important bottom in the smoothed RSI and the price of silver occurred in May 2012.
- The next top is due 35 to 50 weeks later, say second quarter of 2013. A more reliable cycle top in gold is also due in that quarter, which gives credibility to the prediction for a silver top in 2013Q2.
- When the top occurs, the PPD is likely to be around 40%. The current 65 week moving average of silver prices is about $33. Assume that the 65 week moving average in 2013Q2 will be about $35. If the PPD is 40% above the 65 week moving average, then the 7 week moving average would be about $49. But, the actual silver price on a daily basis tends to peak about 15% above the 7 week moving average of prices. Add another 15% to $49 and we produce an estimated price of $56 per ounce for silver at its next intermediate peak roughly estimated to be during 2013Q2.
- If we “bracket” this estimate, the calculations would show:
- a low estimate of $35 plus 35% plus 10% = about $52
- a high estimate of $35 plus 45% plus 20% = about $61
- Hence, a price of $50 to $60 is quite reasonable for a most likely estimate of the next intermediate peak in silver.
- Is this consistent with any other estimates? A graph of silver on a semi-log price chart shows an exponential rise for the past decade. A long-term trend channel that includes all but extremes in prices passes through $60 about the end of 2013Q2, with a chance of a 15% to 25% overshoot, as happened in 2006, 2008, and 2011. Hence the trend channel indicates that even a peak price of $60 to $75 is not unlikely.
What Could Go Wrong?
- Congress could choose to balance the budget, reduce spending by perhaps 40%, and throw the US economy into a depression. In that case, silver probably would fall, rather than rise further from its current price below $30. (Not likely)
- A huge supply of silver might be located and brought to the market, driving prices lower. (Not likely)
- Commodity trading rules or regulations might be changed that could repress the price of silver. (Not likely)
- A financial crash that depresses all markets, including silver and gold, could make the next intermediate term high both lower and later than expected. (Possible)
- Other currently unknown possibilities.
What is Likely to Occur?
- Our economy will operate more or less as it has for the past several decades. Occasional crises will occur, and they will be managed, usually by creating more dollars to bail out banks, major corporations, the stock market, cities, states, pension funds, or whatever, as needed.
- People will increasingly realize that more currency in circulation will create inflation where our dollars will buy less and less. Eventually people will realize they need to trade their dollars for something of value that will protect them from inflation. (Remember the 1970s?) Those choices could be gold, silver, diamonds, fine art, farm land, commodity ETFs, and many other possibilities.
- Silver (and gold) will continue to rise, doubling every 3 – 4 years, until our government manages to tame the deficits, the borrowing, and the inevitable inflation.
Conclusion
An objective and reasonable estimate for the price of silver at the next intermediate peak (estimating 2013 – Quarter 2) is $50 to $60 per ounce (current price is about $28). This is not a prediction based on wishful thinking and hope, but a best estimate based on rational analysis of data stretching back to 1975. The actual price for silver at its next peak could be higher or lower, and the peak might be earlier or later, but this price range and approximate time is, by this analysis, the most probable.The Deviant Investor
GE Christenson