Is Silver Near the Top?

Yesterday I caught NBC’s Meet the Press (MTP). The lead interview was Treasury Secretary Tim Geithner, who spent most of his time talking about the new deficit cutting proposal which Obama announced last week. He was very serious, and if taken at face value, the economy and most stock market investors should have plenty to be concerned about. Fortunately for the sum of most investors, and the short term fate of the stock market, not too many folks actually watch MTP, or if they do, they do not take Geithner very seriously.

As someone who is a doubting Thomas when it comes to the current administration, I must say that Tim’s presentation was in fact very serious, and he came across convincing that Obama is going to start to attack the budget deficits. Here are some excerpts from Tim Geithner:

“The new budget deficit will touch every American. We need to do this; the world is watching us in Washington. We cannot go on borrowing trillions of dollars from the Chinese and from our children. Obama now agrees that it was a mistake to run such large deficits. But we were also struggling to avert another great depression.”

That is one heck of a mea culpa, admitting that running the last 3 years of deficits were a mistake! Later on, Dave Gregory, moderator of MTP quoted Obama with these comments:

“It took me a year and a half to get health care passed. I paid much in the way of political costs. You want to wipe it out in a 6 month spending bill. Do you think I am stupid?”

Obama sounded sensible, pissed off and angry in these statements. I actually like him when he acts as if his back is to the wall and he gets angry. I can actually respect him more than when he is pandering. Nonetheless, I raise this point because Obama and Geithner are coming off very differently than they have over the past two years. Whenever Washington gets serious about cutting the deficit is when part two of the depression will resume.

When I combine the Democratic rhetoric with that of Paul Ryan, who has presented the Republican’s plan to cut $6 billion over 10 years, I come away thinking that our politicians will sacrifice the short term prospects for economic growth, in favor of preserving the fiscal soundness of the US. The only problem with this is that both plans do not cut enough in the way of deficits. This will leave us with is a sinking economy, which in turn will generate greater deficits than the budget proposals propose to achieve. This is because of the increased costs of government programs which kick in, when the economy goes sour. In fact, net transfer payments have increased $500 billion a year since 2007, despite the illusion that the economy is recovering. What will happen to these payments when the economy takes another leg down? In short, these payments will manage to undo much of the fiscal discipline which the current deficit programs promise. This will eventually leave us with the worst of both scenarios: a sinking economy and a sinking fiscal situation.

While I believe that he helped bring us to the place we are at, Alan Greenspan also appeared on MTP yesterday, and he had a few things to say. Notable amongst those were the idea that the government needs to roll back all Bush tax cuts, and go to Clinton era tax rates, which is not that much higher than Bush rates. He also said that we cannot rely on taxes alone to solve the budget deficits. Lastly, Greenspan said that the timing of when the budget deficit becomes a problem is getting to be ‘imminent’, and that our hand is going to get forced sooner than later.”

As with Geithner, I say that if the world was listening to Greenspan then the stock market would be in a full blown sell-off. Perhaps S&P was watching MTP yesterday, because this morning, they revised their outlook for the US’s AAA credit rating to a negative outlook. On this news, stock futures got pummeled for about a percent, gold and silver spiked higher (and then sold off), and remarkably, the Euro, which was under pressure all day, managed to sell off even more, not exactly what I would have expected.

* Dancing on a Silver pin: Along the lines of concerns about a market sell-off, I remain vigilant that the silver and gold markets are approaching a top. While I believe that precious metals will soar to un-told of heights when the US spends, borrows and prints money beyond its means, it does not occur to me that we are going to see gold trade over $5000, or silver over $100 an ounce in short order. However, it is quite possible that we can see $1500, and $50 an ounce, respectively, over the next couple of weeks. Cycle services I follow allow that such could happen by late April or early May, just in time for the favorable stock market seasonal tendencies to turn south as well. Accordingly, I want to take advantage of the current amount of strength in gold and silver to reduce positions to around 25%. While this would still represent a large position, it is prudent to dial it back while there is much money in the trade.

In order to determine when such a top is occurring on a real time basis, I have endeavored to study the 1980 top in silver. The first page of the attachment shows the price of the Jan 1980 silver futures contract, which incidentally, rose about $10 an ounce higher than the next delivery month, which is not a normal situation. Notably, and indicative of a spike higher, silver rose $18 from $32 to $50, over the course of 8 days. In other words, silver went up by over 50% in less than 2 weeks. While I should be happy selling everything I have right now, I am also aware that a great trade can become even better by holding on for the last spike higher. 

There are some markers which were evident during the 1980 market top which might be useful for us to monitor now. The third panel on the first page of the attachment shows the price of silver leading up to the January 18th top. The dashed vertical light green line is over-layer on the date of the top. The top panel shows the relative strength index (RSI) which is one measure which market technicians follow. As the top panel shows, on Jan 18th, the RSI reading failed to achieve the same high as the previous RSI readings when the market made an interim high earlier that month. This is known as a divergence: a technical indicator fails to confirm the actual strength of the market. This is also evident in the reading of the Commodity Channel index (CCI) on the second panel. Lastly, I have included 2 oscillators on the bottom panel, with the pink line being the shorter term, 5 day oscillator, and the blue line being the 10 day oscillator. On Jan 18, the pink line was dropping well below the blue line, showing that even though the market made a new high that day, that the technical situation was deteriorating. All three of these triggers would have gotten you out of the market on the day of the high, although, closer to $47 an ounce which is still $3 from the actual high. Given that silver has not seen $50 an ounce since, that would still be quite an accomplishment.

What does this portend for silver today? The second page of the attachment shows silver’s chart today. As can be seen, there does not appear to be a significant RSI or CCI divergences today. In addition, both the 5 and 10 day oscillators on the bottom appear to be rising, so neither appears to be topping. In short, I am not concerned about there being a top as of Friday’s close.

The next page shows what this chart looked like at the $21 top in 2008. Both the RSI and CCI panels are dramatically diverging with the March 17th top, with much lower readings while the futures contract is making a top. The oscillators on the bottom panel offer little information to go by, except for the fact that the longer term oscillator is barely off the floor while silver is making a new high, a bit of a divergence, but not as precise as the crossover seen in 1980.

Another sign that a silver top is approaching is the divergence between silver and two silver stocks, SLW and CDE. As the next graph shows, over the last few days, silver is continuing up, while SLW and CDE are off by quite a bit. In fact from their August 27th level, the start of QE2, all three were up about 100 to 110% percent, and since then Silver is up to +120%, while the two silver stocks are down to +80%. Now that is a divergence to be wary of!

I then go on to show what happened in the Gold market, at its 1980 top, on the next page. As you can see, gold actually made its $880 high the next trading day after silver’s high, on January 21st. While the RSI did not diverge at the high, the CCI did, and the 5 day (pink) oscillator crossed over the 10 day (blue) oscillator, a couple of days before the top. The next page shows gold as of Friday. If gold is topping now, the divergences in the RSI and CCI are both evident, while both the pink and blue oscillators are both are rising, so not symptomatic of a top. The gold picture is mixed at present. I will take my cues from silver, although I will be selling both metals when I see the right signals. When such a signal does occur, I will report it here, and on a timelier basis, to the real time distribution.