The beginning of the silver age

A lot of people were knocked out of the gold and silver market because of panic during the last two weeks; they capitulated or sold short near the bottom. Many others exclaimed that the gold age was over. However, I see the rising sun in the morning. Both gold and silver will start a new age. In this paper, I’ll try to tell you why we are in the beginning of a more splendid era for gold and silver. I’ll also share with you why silver will be a supernova in the following decades.

1. Capitulation, Rivers of Blood

If you ask me which words I’d like to use to describe the gold and silver market in the last two weeks, “Capitulation, rivers of blood” is my answer. According to the Weekly Commitments of Traders Reports released by the CFTC, the net long of small speculators decreased by 24,310 contracts for gold and 7,846 contracts for silver from April 9 to 23. This means that a gigantic short position was transferred to small speculators from smart hands. The capitulation of small speculators always signals an end to the last bearish trend and the beginning of a new bullish trend. I hazard to say that gold price below $1,500 and silver price below $26 are the short traps. It will not last too long.

2. The Secular Trend of Gold and Silver Is Still Intact

Figure 1: Monthly Logarithm Chart of Gold Price

Figure 1 is the monthly logarithm chart of gold price. We can see a secular trend line A-B-C. It’s really miraculous to witness gold eventually find its support in such a perfect pattern. I don’t need to say anything more. Just remember the price and the date, $1,323/oz on April 15. It will probably be the end of the last correction wave which lasted about 20 months. Why do some people shout that the gold age is over? In fact, the real splendid bullish trend with an accelerated rising speed is just beginning. The long period trend of silver is stronger than gold. Figure 2 is the quarterly logarithm chart of silver price. The $22/oz on April 15 did not even touch the A-B-C trend line. This price is just above silver’s high price in 2008, another way to confirm the end of the down trend. To respond to the so called “the gold age was over,” I would rather say that the door to a new gold age is just opening and the supernova silver is making its debut.

3. Celebrate the Birth of Wave III

Before introducing our leading character — silver — I’d like to expound on the wave information imprinted in figure 1. Some may argue that 20 months for wave II is too short to correct the 144 months in wave I. In my opinion, 20 months of correction is long enough. Why? First, a price correction of 36% is acceptable (1,923 – 1,323 = 600; 1,923 – 253 = 1,670; 600 / 1,670 = 36%). Second, the secular trend line support at point C is strong confirmation for the end of wave II. Third, the bearish market of gold and silver lasted too long, about 20 years, during the last super correction wave from 1980 to 2000, therefore gold needs to accelerate its speed upwards to make up for the lost time. Last but not least, if we consider the abnormal global currency printing speed today, I would say 20 months of correction is too long.

Both gold and silver are at the beginning of wave III. There might be another down leg in the daily chart to confirm the bottom next month, but that may not occur. It is a rare opportunity now to enter for those who missed wave I. Generally, wave III will run faster and gain much more compared with wave I. It will probably take gold to $10,050 to $16,000 per ounce in circa 5 to 8 years or even faster. Meanwhile, silver will go to $500 to $1,100 per ounce then.

An alternative method to count waves is to separate the gold trend into nine waves for this super-cycle after 1999. It’s in the beginning of wave 7 now. Currently, silver can also be considered to be at the beginning of wave 3 in wave III. Personally, I think all these counting methods are correct. We all know that theory wave explains the history better than it forecasts the future, so there should be multiple methods to count waves.

4. Silver: Cup with Handle Pattern

The silver chart will provide a classical cup with handle pattern for future investors to study. The body of the cup is finished already. We are waiting for the completion of the handle. Because the cup lasted 31 years, the handle needs a few years to make it strong enough to hold the cup. Personally, I think it may take three or four years this time. That means silver price will break through the neckline at $50, or its historical high, in 2014 or 2015. Generally, the potential gain from the neckline will equal to or exceed the body size, 14.37 fold. Therefore, the next station for silver is $700+ / oz after the completion of cup with handle pattern. Silver may yield another body size in one or two decades, the price will be higher than $10,000/oz then.

Figure 2: Quarterly Logarithm Chart of Silver Price

5. What Factors Support Silver Price Going up?

First, silver stock is decreasing. Humans have dug out about 50 to 60 billion ounces of silver and 5 to 6 billion ounces of gold up to now. Most of the gold, more than 90 %, is still there, but there are only about 1 billion ounces of silver left. More than 95% of silver was consumed by industry in the last century. Because of its incomparably excellent physical and chemical characteristics, silver is widely used almost everywhere such as in solar energy, television sets, computers, cell phones, digital cameras, all other electronic equipment and many other areas. The dwindling trend of silver stock will continue until silver is completely depleted. The decreasing silver stock is perpetual propulsion for silver price going up.

Second, global money supply is increasing dramatically every year. From January 1980 to now, the U.S. monetary base has increased 22 fold from $130 billion to $3,025 billion; China’s M2 has increased almost 800 fold from 130 billion yuan to 103.6 trillion yuan; all other countries have also increased their money supply. Total world money supply has increased above 22 fold, the same as the USA during this period. If we calculate the high price of gold and silver in 1980 with the current money supply, gold price will go beyond $20,079 / oz (873 x 23), and silver price will be higher than $1,158 / oz. Even though today’s gold stock is more than its stock in 1980 (increased about 50%), we can get gold price at $13,386 / oz (20,079 / 1.5). What about silver? Believe it or not, today’s silver stock is no more than one third of its stock in 1980. Therefore, the corrected high price for silver in 1980 should be above $3,500/oz. I expect to witness this price in 20 years.

Some may worry about what will happen if the central banks stop printing currency. Will the price of gold and silver go down then? First, no central bank wants to stop printing if they can print. The printing speed may slow down during some periods, but it never stopped in monetary history (details concerning this topic are beyond this article). Second, even if they want to stop printing, it’s already too late because they have printed too much. Keep in mind that silver stock will continually decrease and money supply will simultaneously increase. As long as the central banks can discretionarily print currency, the secular uptrend of gold, silver and all other commodities will never stop. Silver price will go higher and higher.

6. A Word to the Price Ratio of Gold and Silver

The price ratio of gold and silver should be in accordance with the ratio of the amount of silver and gold. What is the ratio now? How can we determine the ratio? It should be between 9 and 16. First, as I mentioned above, the ratio of all silver and gold dug by humans up to now is about 10. Second, the ratio of silver and gold dug by all countries in recent years is around 9. Third, according to U.S. Geological Survey, the ratio of available underground reserved silver and gold in the world is about 10. Last, surveys by geologists show that the amount of silver and gold in the earth’s crust is about 16:1. All these data suggests that the price ratio of gold and silver should be between 9 and 16. This is also coherent with the price ratio of gold and silver throughout 5,000 years of human history, which was between 8 and 16 most of the time.

Many people are accustomed to the high price ratio of gold and silver, it is about 60 these days. The possible reasons may be that they presume there is much more silver than gold, or the futures contract size designed for silver is 50 times that of gold in the United States. In fact, silver stock is less than gold stock today. Compared to more than five billion ounces of gold, there are only one billion ounces of silver available for investment now. The futures contract size ratio of 50 doesn’t mean the price ratio should be 50. If that is true, the price ratio should be 15 in China because the designed contract size ratio of silver and gold is 15 in all exchanges over there. Clearly, this is not true.

The cardinal reason that many investors buy gold is based on the assumption that gold is money. However, silver is also money and is depleting much faster than gold. Silver price must go up and will go up faster than gold price. Therefore, the price ratio of gold and silver will gradually go down to the area between 9 and 16 in the next few years and will continue to go down in the future.

Conclusion: Super Stars Come on the Scene!

I have demonstrated a panorama of the price uptrend of gold and silver in the next few years or decades from both technical analysis (trend, wave theory, statistics and patterns) and value analysis (supply and demand, money supply, hyperinflation and gold silver price ratio). I firmly believe that the price of gold and silver is extremely undervalued right now. The price slump two weeks ago provided a perfect purchasing opportunity for those who had no gold and silver in their portfolios. The potential yield could be eight to ten times or more for gold and dozens times for silver in the next few years.

Because the central banks can discretionarily print currency, super inflation will come and is inevitable. There are hundreds of examples of super inflation in human history such as Weimar (1919 to 1923), China (1940 to 1948), Zimbabwe (2000 to 2010) and so on. People will lose confidence in all fiat currencies and rush to the real money – gold and silver. A new worldwide currency supported by gold or gold and silver will definitely come to fruition. April 15, 2013 was probably the beginning of a new uptrend for both gold and silver, and the transition from the gold age to the silver age.

About the Author
Xinshan Zhou is an independent trader with 20 years experience in trading commodities, equities and currencies. Zhou verses both technical analysis and value investment with a multi-disciplinary background including Economics, Finance, Electrical Engineering, Geosciences and Computing Science.