Silver market exuberance gains momentum

The average daily gains over the entire spans of these uplegs was 0.62%. In the final 6 weeks before these toppings, silver surged almost 30% on average. In the terminal 4 weeks, it rallied nearly 20%. In the final 2 weeks, it blasted over 14% higher. And in its final week before its upleg-ending topping, silver averaged big gains exceeding 7%. The average daily volatility ran 2.1% over this final week. Relative Silver peaked above 1.40x, and exceeded this danger zone for a varying number of days.

These numbers are hard data, not opinion or theory. So it is fascinating to compare what silver has done in its current upleg with what it averaged in its massive pre-panic ones. As of this week, silver has rocketed over 106% higher in just over 7 months! This is a considerably-greater gain than its past uplegs’ average of 92%, over about the same period of time. Distilled into a daily average, this silver upleg’s 0.69% gains were among the biggest ever seen in this bull.

Over the 6 weeks before silver’s latest high this week, it shot up nearly 35%! This is a near-parabolic ascent that almost equals the biggest one yet seen ahead of the May 2006 top. Provocatively, back then silver sentiment and exuberance were as bullish as we’re seeing today. Over the past 4 weeks before its latest high, silver shot up over 19% which is close to the 20% average. So at least over terminal 6-week and 4-week spans, silver’s latest ascent certainly matches past unsustainability thresholds.

Because silver has failed to rally much over the past week or so, its final 2-week and 1-week gains aren’t as extreme as past averages. We are talking almost 8% versus over 14% on the 2-week metric, and just over 4% compared to over 7% on the final-week one. This lackluster action has also dragged down our current upleg’s latest volatility read, but silver has been really volatile in recent weeks as traders well know.

And in rSilver terms, today’s upleg is the most extreme since the massive one topping in May 2006. Silver trading at 1.513x its 200dma earlier this week was the highest seen since that month! Silver has also enjoyed more days above 1.4x recently than at every other major top since that one as well. So when we look at measures of the magnitude and late speed of silver’s current upleg, they track very well with what we’ve seen at past major toppings. And that May 2006 topping is the closest match by far.

What happened after that one? Silver plummeted so fast that many traders called it a crash. It was brutal beyond belief. If you weren’t trading silver or silver stocks back then, it is hard to even communicate how ugly it was and how many traders were wiped out. Silver plunged over 35% in just over a month, a mind-blowing selloff. And lest you think that’s extreme, it really isn’t for silver. Its average post-top correction ran about 30% over a span of less than a month and a half. Yes, under 6 weeks!

A 30% to 35% loss sounds academic to some, so consider it in absolute terms. If silver indeed topped earlier this week, falling by a third would hammer it back down to $24 within a couple months on the very outside! Though this degree of correction would be totally normal and expected, and wouldn’t even come close to jeopardizing silver’s secular bull, the damage $24 would do to silver psychology and silver-stock levels would be catastrophic. Silver stocks usually leverage silver selloffs, amplifying its losses!

On average these pre-panic corrections saw daily losses approaching 1.2%. By the first week after their tops they had fallen over 11%, nearly 18% by the second, over 22% by the fourth, and almost 24% by the sixth. When silver falls 10% a week for a couple weeks, it scares silver speculators to death. They rush to abandon their recent love with blinding speed. And selling begets ever-more selling, as prices spiral lower more and more traders capitulate.

And today we are in a unique situation that makes this potential silver topping even riskier than most. Believe it or not, a major driver of silver’s fortunes is the state of the general stock markets! As such a hyper-risky commodity, silver is heavily buffeted by the sentiment winds emanating from the stock markets. When general stocks enter a correction, silver tends to fall with stocks unless gold is exceptionally strong. And even then silver drifts sideways, torn between following gold (its normal driver) and stocks. As I’ve warned in recent weeks, the US stock markets are due for a major correction today.

The sentiment splash damage from this alone will hammer silver lower, but now stock-market traders have direct access to silver via the popular SLV silver ETF. This vehicle is a direct conduit between the vast pools of stock-market capital and physical silver bullion. As stock traders get scared by the stock selloff, they will likely sell all their risky trades including SLV. If they dump SLV at a faster rate than silver is being sold in the futures markets, this ETF’s custodians will be forced to sell silver bullion (intensifying the silver selloff).

Differential selling pressure forces physical ETFs to sell their underlying assets to raise enough cash to buy back the excessive shares offered for sale. If they don’t do this, the ETF will decouple from its underlying to the downside and fail in its tracking mission. SLV didn’t even exist at the April 2004 topping, was just 2 weeks old at the May 2006 one, and wasn’t super-popular yet by the March 2008 one. So today’s topping may very well be the first one where stock-market selling directly hammers silver prices.

While silver’s secular bull still has awesome potential in the coming years, today silver is very overbought and looks to be topping. It needs to correct to rebalance sentiment, to eradicate the excessive greed and irrational exuberance today. And silver corrections tend to be unbelievably brutal, they are hard and fast and take no prisoners. When most silver enthusiasts hear this message, they get depressed.

But corrections are actually very exciting and bullish! Our goal as investors and speculators is to buy low and sell high, right? The best times to buy low, whether we are talking physical silver coins or great silver stocks, is just as one of these massive corrections matures. Would you rather add new silver investments at $36 or $24? Would you rather buy silver stocks at recent highs or 35% to 50% lower? Corrections are the best buying opportunities ever seen within ongoing secular bulls, they are a great blessing.

The bottom line is silver looks to be topping based on bull-to-date precedent. The odds are very high that silver is in store for another one of its brutal and unforgiving corrections. These are dangerous events not to be trifled with, as silver tends to plummet by nearly a third in less than 6 weeks! Silver stocks usually amplify these losses. Traders caught unaware by a major silver correction are ripped to shreds.

Nevertheless, these are very healthy and necessary events. They rebalance away hyper-bullish and greedy sentiment, resetting the stage so silver’s secular bull can continue powering higher. And corrections yield the best buying opportunities ever seen within ongoing bulls. So investors and speculators looking to add silver-related positions have a rare and valuable opportunity to buy low.

Find out more information about Zeal's reports, and contact Adam Hamilton, CPA, at www.zealllc.com.

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