Europe's "Great Deleveraging" Has Only Just Begun
While
Europe's financial services sector equity prices have retraced almost
half of their May11 to Oct11 losses as we are told incessantly not to
underestimate the impact of the LTRO, Morgan Stanley points out the
other side of the balance sheet will continue to sag. While short-term
liquidity (at least EUR-based liquidity as USD FX Swap lines are back at record highs this week) may have seen some of its risk culled, the real tail risk of the 'Great Deleveraging' has only just begun.
As MS notes, we may have avoided a credit crunch but European banks
could delever between EUR1.5 and EUR2 Trillion over the next 18 months
as the unwind is far from over. History suggests that over a longer
time-frame, around five to six years - the deleveraging could reach EUR4.5 Trillion assuming zero deposit growth and the LTRO will slow but not stop the process. As we discussed last night,
this deleveraging will inevitably lead to continued contraction in
European lending to the real economy (no matter how much liquidity is
force-fed to the banking system) which will most explicitly impact
Southern and Peripheral Europe and the Emerging Markets of Central and
Eastern Europe. In the meantime, we assume the Central Banks of the
world will do the only thing they know, print and funnel liquidity to
these increasingly zombified financial institutions; and while Dicky Fisher was calming us all down this evening on our QE3 expectations (given Gold and Silver's recent price action), it seems perhaps even the Fed is getting nervous at just how little surprise factor they have left
given such a ravenously hungry deleveraging and insatiable need to
maintain the market/economy's nominally positive appearances.Merkel Snubs France As Europe's "AAA Club" Meets In Berlin Tomorrow ex-Sarko
A few days after Germany proposed the stripping of Greek fiscal authority from the insolvent country, in exchange for providing funding for what German FinMin Schauble called today a "bottomless pit" (and Brüderle chimed in saying that "a default of the Greek government would be bitter but manageable), Sarkozy decided to demonstrate his "muscle" if not so much stature, and openly denied Germany, saying "There can be no question of putting any country under tutelage." Sure enough, it was now Germany's turn to reciprocate the favor. According to Bloomberg, "Finance ministers from the four euro- area countries with AAA ratings -- Germany, Finland, Luxembourg and the Netherlands -- will meet in Berlin tomorrow afternoon, a German Finance Ministry spokesman said." And as is well known, FrAAnce no longer a member of this, however meaningless, club. "The gathering is part of a a series of meetings convened by officials from the highest-rated euro states, the spokesman said, speaking on the customary condition of anonymity. Ministers will discuss current issues without briefing reporters after the meeting." And so the gauntlet of public humiliation is now once again back in Sarkozy's court. The good news: if the de minimis Frenchman does not get his act in order, and overturn the massive lead that his challenger in the April presidential elections has garnered, he will need to endure the humiliation for at most 3 more months. In other news, it appears that when it comes to saving political face, the rating agencies are actually quite useful.Morgan Stanley Cuts EURUSD Forecast From 1.20 To 1.15 On Upcoming ECB Easing
Stop us when this sounds familiar: 'While we expect central banks globally to continue to provide liquidity, it is the ECB’s position that has changed the most dramatically. The relative expansion of the ECB’s balance sheet is EUR bearish in our view....the liquidity being generated by the ECB is to a large extent absorbed by the bank refinancing process, hence the large deposits at the ECB. Although there is clear evidence that some of the funds have been used in the peripheral bonds markets, helping to stabilise sovereign yield spreads, lending into the real economy remains constrained. We believe that the relative performance of money multipliers will be a significant driving force for currency markets in the coming year. We see the ECB liquidity as a negative for the EUR" At this point the preceding should remind our readers, almost verbatim, of this Zero Hedge post from January 31, "Reverting back to our trusty key correlation of 2012, namely the comparison of the Fed and ECB balance sheet, it would mean that absent a proportional Fed response, the fair value of the EURUSD would collapse to a shocking 1.12 as the ECB's balance sheet following this LTRO would grow from €2.7 trillion to €3.7 trillion." And the reason why the latter extract should remind readers of the former is because it is the basis for the just released conclusion by Morgan Stanley cutting its EURUSD price target from 1.20 to 1.15.
Greece PSI still nowhere in sight/SLV short 26million oz/China heading for hard landing/ MFGLobal on the missing funds/
Good
evening Ladies and Gentlemen:
Gold finished higher by $11.40 to $1758.50. At first, gold had been
repelled from the banker's strong resistance $1750 line in the sand
early in the European session. However it then recovered to pierce this
resistance and finish well above the resistance to close at its high.
The fact that gold did this prior to the jobs report is definitely an
extremely
Euro Gold comments
Once again, as has been the recent pattern in the gold market, gold priced
in terms of the Euro, or "EuroGold", is putting in a very strong showing in
today's trading session. If you note on the weekly chart, it has moved to
within about 32 euros of its former all time high in price. Many
traders/investors may be dismissing European Sovereign debt issues, but the
gold market certainly has one eye on it.
I want to see how this market acts now that we are moving into these
regions as this will be a decent barometer of sentiment towards the woes
surrounding Europe. Any further escalat... more »
Chart Update
The Tech Team is still working with the server company to blunt and stop
the continued DoS attacks. In the meantime, at least we have this backup
platform to utilize.
I'll keep this brief. I had tried to buy back my Mar $35 silver call today
but I never got filled. Nuts! I thought I might on the pullback late
morning but it never happened. I was looking to buy it back because I'm
expecting a decent UP day tomorrow, post the BLSBS.
I may still get another chance. If tomorrow plays out like your typical
BLSBS day, the metals will surge in the moments right after the numbers are
relea... more »
Got Gold?
*"Gold, unlike all other commodities, is a currency...and the major thrust
in the demand for gold is not for jewelry. It’s not for anything other than
an escape from what is perceived to be a fiat money system, paper money,
that seems to be deteriorating." … Alan Greenspan, ex-US Federal Reserve
Chairman, August 23, 2011*
Just had an interesting conversation with a long-time good friend of mine
who has spent most of his career in wealth management for big banks and
knows a lot about financial theory. He commented that the only solution
that makes sense for wealthy people is to put... more »
45% Of Greeks Have Never Used The Internet
If one were to consider that nearly half the population of a given country has never had the pleasure of killing otherwise efficient time with the likes of Facebook, and other fad internet sensations, one would assume that the efficiency of the population would be far higher than other places whose citizens spend every waking hour gazing at a monitor. One would be wrong. As the following chart from Eurostat via Goldman shows, about 45% of the Greek population has never used the internet. Surprisingly the balance of the PIIGS is not far behind, with Portugal, Italy and Spain hot on Greece heels (which 5 years ago had two thirds of its population never interact with the web). Is it possible that sitting in front of a computer, uploading millions of pics and "liking" this and that does indeed do miracles for globalization and corporate efficiency? Was Zuckerberg's letter, gasp, 100% correct?
What Lies In Store For The "Cradle That Rocks The World" - A History Lesson In Crisis
With
the world ever more lethargic daily, as if in silent expectation of
something big about to happen (quite visible in daily trading volumes),
it is easy to forget that just about a year ago the Mediterranean
region was rife with violent revolutions in virtually every country
along the North African coast. That these have passed their acute phase
does not mean that anything has been resolved. And unfortunately, as
BMO's Don Coxe reminds us, it is very likely that the Mediterranean
region, flanked on one side by the broke European countries of Greece,
Italy, Spain (and implicitly Portugal), and on the other by the unstable
powder keg of post-revolutionary Libya and Egypt, will likely become
quite active yet again. Only this time, in addition to social and
economic upheavals, a religious flavor may also be added to the mix. As
Coxe says: "Today, the Mediterranean is two civilizations in
simultaneous, rapidly unfolding crises. To date, those crises have been
largely unrelated. That may well be about to change." Coxe bases part
of his argument on the same Thermidorian reaction
which we have warned about since early 2011, namely the power, social
and economic vacuum that is unleashed in the aftermath of great social
change. But there is much more to his argument, which looks much more
intently at the feedback loops formed by the divergent collapsing
economies that once were the cradle of civilization, and this time could
eventually serve as the opposite. To wit: "The eurocrisis has been
front and center for nearly two years, during which time the economic
and financial fundamentals have continued to deteriorate. “The
Arab Spring” came suddenly, in a series of outbursts of optimism. It may
have come at the worst possible time for the beleaguered nations of
the North Shore. The Mediterranean has entered one of the
stormiest periods in recorded history. It is the major contributor to
risk in global equity markets. It is too soon to predict how these
crises will end. The Cradle of Civilization is rocking amid an
array of winds and storms. “The Arab Spring” ...may have come at the
worst possible time for the beleaguered nations of the North Shore."Pre-QE Trade Remains Only Beacon As Gold, Silver Outperform, Financials At October Highs
Equity
and credit markets eked out small gains on the day as Treasuries
limped a few bps lower in yield (with 30Y the notable underperformer)
and the EUR lost some ground to the USD. ES (the e-mini S&P futures contract) saw its lowest volume of the year today
at 1.35mm contracts (30% below its 50DMA) as NYSE volumes -10% from
yesterday but average for the month. Another small range day in almost
every market aside from commodities which saw significant divergence
with Silver (best today) and Gold surging (up around 1.15% on the week)
while Oil and Copper dived (down 2.6-3% or so on the week) with the
former managing to scramble back above $96 into the close. ES and the
broad risk proxy CONTEXT maintained their very high correlation as Oil
and 2s10s30s compression dragged on ES but AUDJPY and TSYs post-Europe
inching higher in yields helped ES. HYG underperformed all day (often a
canary but we have killed so many canaries recently). Energy names
outperformed on the day (as Brent and WTI diverged notably) but financials did well with the majors now back up to the late October (Greek PSI deal) highs.
All-in-all, eerily quiet ahead of NFP but it feels like something is
stirring under the covers as European exuberance didn't carry through
over here (except in ZNGA and FFN!).Market Stoned Like It's 1999
Presented
with little comment but we thought, given the exuberance surrounding
Facebook, ZNGA's rally, and FFN's double, that we would point out that
the four-week average volume on the NYSE has dropped to levels not seen since, yes you guessed it, 1999.Mike Krieger Explains Why It's The Leadership, Stupid
Mike Krieger submits: "I’ve always loved history. Even all the way back to grade school I remember it being my favorite subject. Very early on I noticed certain patterns in history and I wondered why they occurred. When I was first exposed to European history, I recall being absolutely floored by how certain countries could become so rich and powerful and then subsequently collapse so stunningly and rapidly. The one that really boggled my mind was Spain - the homeland of my maternal grandfather who I never met. Here was a country that conquered and viciously looted essentially all South America other than Brazil (thanks to the pope being magnanimous enough to grant that part of the world to Portugal in the Treaty of Tordesillas), Mexico, Central America and parts of the United States. The gold and especially silver that was taken back to Spain was the stuff of legend, yet almost at the same time they had defeated the native peoples overseas their kingdom at home was crumbling. Not to bore anyone with too much history, but by the mid 1500s the Spanish had essentially conquered the Aztecs (Mexico) and the Incas (Peru). At the time, the Aztec capital, Tenochtitlan was estimated to be larger than any city in Europe. Despite these tremendous “successes” and the riches that came with them, the battle of Rocroi in Northern France in 1643 less than one hundred years later marked the end of Spanish dominance in Europe. What is so fascinating to me is that while the conquistadors were out raping and pillaging halfway around the world the domestic economy was experiencing economic crisis. There were episodes of major currency debasements in the homeland as the crown was forced to fight wars on their borders as well as fund the excursions abroad. It is important to note that the collapse came pretty quickly as it was only in 1627 when things were still looking pretty good for the empire that The Count-Duke Olivares famously stated: “God is Spanish and fights for our nation these days.” Does this story sound familiar?"Former MF Global Chief Risk Officer Sacked For Doing His Job, Disagreeing With Corzine
Yesterday we noted how a CBO analyst may have been terminated for her conflicting views on model assumptions, especially when they veered away from the Wall Street-defined norm. Today, we find that the same approach to dissent may have been the reason why MF Global ended up taking inordinate risk, and ultimately blowing up, leaving over a billion in client money transitioning from liquid to gas phase overnight. According to Reuters, "The former chief risk officer at MF Global who raised red flags about the firm's aggressive trading bets told lawmakers that his warnings contributed to the firm's decision to let him go in early 2011. Michael Roseman, who was ousted in January 2011 from the now-bankrupt futures brokerage, said he rang alarm bells about the firm's exposure to European sovereign debt a year before the firm collapsed in late October of 2011." Roseman's statement on whether his skepticism to Corzine's get rich quick scheme was the reason for his termination? ""My views on risk certainly played a factor in that decision," Roseman told a House Financial Services subcommittee, about why he was asked to leave the firm." And so the status quo continues: any time anyone ever dares to disagree with broad misconceptions, whether it is regarding infinitely rising home prices, broad global compression trades, or the ability of European banks to onboard toxic CDOs in perpetuity is always promptly shown the door. The flipside to this complete lack of checks and balances? Why the bailout culture of course, in which finding one company responsible for gross complacency would mean all are guilty. Which is nobody will ever go to prison as it would set the "worst" possible precedent ever: that one is ultimately responsible for their own stupidity. Said otherwise: the best qualification one can hope to add to one's resume: "distinguished yes man with honors."Courtesy of http://www.metallwoche.de
Dear CIGAs,
Today on Metallwoche.de we present to you an interview with Jim Sinclair in two parts. In the first part Lars Schall spoke to Jim about some interesting remarks Chris Powell from GATA had to say about gold in front of the Fed building in Washington D.C. Furthermore Lars asked for Jims opinion concerning the gold storage of different countries, including Germany, with the New York Fed and the Treasury department and if these countries shall demand their gold back home.
In the second part of this interview for Metallwoche.de, Michael asked for Jim Sinclairs view on the gold market after the Fed-statement last week and the possible implications near and longer term.
Click here to listen to the full interview on metallwoche.de…
Jim Sinclair’s Commentary
QE to infinity.
Planned layoffs surge in January: Challenger NEW YORK | Thu Feb 2, 2012 9:48am EST
(Reuters) – The number of planned layoffs at U.S. firms surged in January to its highest level in four months as retailers and financial firms cut jobs, a report on Thursday showed.
Employers announced 53,486 planned job cuts last month, up 28 percent from 41,785 in December, according to the report from consultants Challenger, Gray & Christmas, Inc.
January’s job cuts were also up from the same time a year ago, gaining 38.9 percent from the 38,519 layoffs announced in January 2011.
A surge in job cuts at the start of the year is not unusual, the report said. January is historically the heaviest month of cuts, averaging 101,084 layoffs between 1993 and 2001.
Retail companies cut 12,426 jobs, the largest amount for the sector in two years. The layoffs were due to store closings and other cost-cutting measures, rather than an exit of seasonal workers, which are typically not announced cuts.
More…
Jim Sinclair’s Commentary
You doubted QE to infinity. You ridiculed $1650 as being impossible and its advocate as being a screwball.
Now we are headed into the $1700 to $2111 range on our way to Alf’s numbers.
Bernanke: Fed will protect U.S. economy from Europe By Annalyn Censky @CNNMoney February 2, 2012: 10:56 AM ET
NEW YORK (CNNMoney) — The recovery remains "frustrating slow" in the United States, and now Europe’s debt crisis is posing additional challenges, Federal Reserve Chairman Ben Bernanke told Congress Thursday.
"Risks remain that developments in Europe or elsewhere may unfold unfavorably and could worsen economic prospects here at home," Bernanke told the House Budget Committee.
But he also assured lawmakers that the Fed is doing everything in its power to prevent an economic slowdown in the U.S.
"We are in frequent contact with European authorities, and we will continue to monitor the situation closely and take every available step to protect the U.S. financial system and the economy," Bernanke said.
Europe’s debt problems started in Greece more than two years ago, and the situation there has yet to be fully resolved.
Repeating points he has made before Congress in prior appearances, Bernanke told the committee members that while cutting the national debt should be a priority over the long term, they should also take great care not to impede the current economic recovery.
More…
Jim Sinclair’s Commentary
What other kind of a financial crisis is there? The slow train wreck precedes the condition described as crisis.
Crises have been times of actions that are designed not as solutions but as mechanisms to kick the can down the road.
2012 is a year of actions with consequences on a road marked dead end. 2014 is the year of the true dead end.
Ben Bernanke: Possibility of Sudden Fiscal Crisis
Click here to watch the video…
My Dear Friends,
Please read the following. This exchange between Monty and I is not simple banter between professionals.
Please accept this as a definitive warning. What Uncle gives, Uncle can take away. You and your tax benefited accounts are now directly in harm’s way
Respectfully,
Jim
Jim,
How long until the US becomes like Argentina and all pensions will have to buy government bonds? Does the lifetime annuity option below allow you to buy government bonds and hold them until you die? This is the only way Argentina can sell government bonds since they have destroyed their economy and the currency is down 80%.
Monty Guild
U.S. Treasury, Labor Departments Act to Enhance Retirement Security for an America Built to Last
Executive Actions Broaden Options, Increase Transparency for 401(k) Savers
WASHINGTON – Following President Obama’s State of the Union Address in which he proposed a blueprint for an American economy built to last, the U.S. Departments of the Treasury and Labor today announced two executive actions designed to help enhance security for millions of Americans saving for retirement. The measures announced today will expand transparency in the 401(k) plan marketplace and broaden the availability of retirement plan options so Americans can maximize their ability to save responsibly and securely.
The Treasury Department’s proposal will reduce regulatory burdens and make it easier for retirees to choose to receive their benefits as a stream of income in regular payments for as long as they live. These flexible “lifetime income” options can provide greater certainty in retirement and minimize the risk of retirees outliving or underutilizing their retirement savings.
“When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings. Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security,” said Treasury Secretary Tim Geithner.
The U.S. Department of Labor’s Employee Benefits Security Administration today issued a final rule that will provide employers sponsoring pension and 401(k) plans with information about the administrative and investment costs associated with providing such plans to their workers. The department also announced a three-month extension in the effective date of this rule, meaning service providers must be in compliance by July 1, 2012, for new and existing contracts or arrangements between ERISA-covered plans and service providers.
“As President Obama has said, we’re at a make or break moment for the middle class and those trying to reach it. What’s at stake is the American value that hard work pays off. The common-sense rule that we are finalizing today will shed light on the true costs of 401(k) accounts and ultimately reward those working hard and saving for retirement,” said Secretary of Labor Hilda L. Solis. “This rule, and its companion participant-level fee disclosure rule, will greatly increase the level of transparency in retirement plans. When businesses that sponsor retirement plans, and the workers who participate in those plans, get better information on associated fees and expenses, they’ll be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement.”
Together, the actions by both the Treasury and Labor Departments will expand available options and provide greater transparency to help working families successfully plan for retirement and manage their retirement savings. The Council of Economic Advisers has prepared a detailed report describing the significance of today’s actions, which can be accessed here.
More…
Hi Jim,
This is quite a contrast to your view on social responsibility.
Best,
CIGA RJ
RJ,
This is simple insanity in the information age.
Jim
Mozambique slams foreign mining firms
Johannesburg – Australian and Brazilian mining giants are moving villagers to land insufficient for farming and far from jobs to make way for coal projects in central Mozambique, and then sidelining local entrepreneurs as they exploit the region’s natural resources, according to a new report.
The independent Southern Africa Resource Watch, which monitors the impact of mining across the region, sent researchers to study resettlement efforts by Rio Tinto of Australia and Vale of Brazil, which recently began mining in Mozambique’s Tete province.
In a statement sent to AP late on Wednesday, Vale said it spent three years working with villagers to plan the resettlements of some 1 200 families. Vale said it was helping farmers in the new villages, and has built
More…
Jim,
France is preparing the bailout of the French municipal lending business of Dexia or Dexia Municipal Agency (Dexma).
According to Reuters, the French Government is ready to take 25% of Dexma.
The Caisse des Dépôts et Consignations, the French sovereign wealth fund, would take 35% instead of the 65% previously planned last October.
Dexma is responsible for 80 Billion Euro (105 Billion USD) of toxic (using derivative) loan made to the French Departments, Regions and Municipalities.
Dexia provided toxic loan to various European countries like Italy, France and Belgium.
QE is all over the place! We just have to look carefully.
Best regards,
CIGA Christopher
Plan to nationalise Dexia finance unit By Scheherazade Daneshkhu in Paris and Stanley Pignal in Brussels
Parts of the French municipal lending business of Dexia could be nationalised, signalling that a complicated deal to dismantle the stricken Franco-Belgian bank may be unravelling.
Michel Bouvard, chairman of the supervisory board of the Caisse des Dépôts et Consignations, the French sovereign wealth fund, confirmed on Friday that a nationalisation plan was one of the options under discussion for Dexia’s French municipal finance unit.
Dexia is in the process of being dismantled after it ran out of cash in October as interbank lending dried up. Its Belgian retail arm was nationalised by Brussels, which paid €4bn for the operations, while CDC agreed to take a stake of 65 per cent in Dexia Municipal Agency (Dexma), the stock of loans to French councils.
More…
My Dear Friends,
Since my apprenticeship with Bert Seligman in the 1950s, I have felt that no matter what tool a person uses in the market, the consistently successful have a mercantile sense for the subject of their attention and it is that mercantile sense that distinguishes them as much more than the tools they use. This answers the question of why two people of equal intelligence and emotional control can have different results in investing and trading. I will assure you I am a Gold.
Having set this foundation and suggesting you hold on to your hat, here is Alf’s answer to the question of what happens to silver if gold trades at $4500. You know my overall feeling that silver is a game, but one hell of a good game if you get it right. I am not a Silver which means I do not feel the impulse of the silver market in a mercantile manner.
Regards,
Jim
New EW Silver Discovery By Alf Field
I have received numerous emails asking about silver. This article was prompted by a question enquiring what the silver price might be if my gold forecast of $4,500 proved to be correct. The question caused me to take a closer look at silver.
The reason why I have written very little about silver in the past was because the beautiful Elliott Wave (EW) symmetry and predictable relationships visible in gold were not to be found in silver. This article reveals a new EW discovery that proves that EW is alive and well and living in silver.
I first wrote about silver in December 2003 in an article titled “US Dollar Implosion – Part II”. The link to this article is at: http://www.gold-eagle.com/editorials_03/field120503.html. The brief piece on silver was tacked onto the end of that article. In view of its brevity, the 2003 silver piece is reproduced in full below:
SILVER
“In past crises, the wealthy protected themselves by purchasing gold and gold related assets. Ordinary people, by far the greater number, could rarely afford to buy gold. Being far cheaper, they previously had to buy silver. This metal became the poor man’s choice as an asset to protect their savings. Silver has so far lagged gold in the early stages of this bull market, but that situation seems about to change.”
“Throughout recorded history the average relationship between silver and gold has been 15oz silver to 1oz gold. The ratio at present is a far higher 75:1 ($400/$5.30). This is massively out of line. If gold were to double to $800 per oz, it would not be unreasonable to expect the silver/gold ratio to decline sharply, possibly as low as 40:1. With gold at $800, this would position silver at $20.
Thus a 100% increase in the price of gold could possibly be accompanied by a simultaneous 400% increase (perhaps more) in the price of silver. This offers significant opportunities both in silver bullion and silver mining shares.
The above graph of the price of silver has been borrowed from an excellent recent article by Dan Norcini entitled “A Technical Look at Silver – Update”. What is quite clear from the graph is that silver’s 22-year bear market down trend has come to an end. As Dan Norcini says, a new bull market in silver has been born. It is difficult to argue against this contention and I have no intention of doing so. A silver price above $6.80 would complete a fabulous head-and-shoulders base formation. With this as a foundation, it would be possible to project a very large rise in the price of silver for the future.” – end of the December 2003 quotation.
Silver did reach $20.68 in March 2008 at the same time that gold peaked at $1003. The silver to gold ratio was thus 48.5 in March 2008. The lowest this ratio has reached SINCE 2001 is about 32, achieved at the end of April 2011 when gold was around $1570 and silver peaked in the $49 area. At that point gold had experienced a 6-fold increase from its bull market starting point of $255 while the silver price rose 12-fold from its starting point of $4 in November 2001.
The quick answer to the question of what the silver price will be when gold gets to $4,500 is to pick your favorite silver/gold ratio and divide it into $4500. The current ratio incidentally is about 51. If you choose the lowest ratio achieved since 2001 of 32 that would produce a silver price of around $140 ($4500 divided by 32).
This is not a satisfactory answer, so I decided to approach the Elliott Wave analysis of silver from a different angle. Instead of working upwards using the analysis of the minor waves, which was the technique used in the gold calculations, what if we worked backwards in silver starting with the larger waves?
Gold and silver tend to move in tandem, not in an exact synchronization, but enough to suggest that the Major waves of both metals should coincide from a time perspective. We know that in gold the Major ONE wave peaked in March 2008 at $1003 and that Major TWO declined to $680 in November 2008.
Silver also had a peak in March 2008 at $20.68 and declined to an important low of $8.77 in November 2008. If we assumed that the peak at $20.68 in March 2008 was the end of Major ONE and the decline to $8.77 the end of Major TWO, how would the various percentages work out? When I did these calculations I was astonished at the relationships and wave counts that emerged.
The chart below is the monthly spot silver price shown in log scale so that the percentage changes are visible. The bull market started in November 2001 at a price of $4.02. From that point to the suggested peak of Major ONE at $20.68 there are five clear waves visible, marked 1-2-3-4-5. The prices at the various turning points are also displayed.
The analysis of the suggested Major ONE wave is set out in the body of the chart. The typical impulse wave relationships are immediately apparent. Both corrective waves 2 and 4 are similar (-33.7% and -35.9%). Whenever two corrective waves are similar it is a signal that they are part of the same larger wave structure. On its own, this fact would confirm that the 5 wave move from $4.02 to $20.68 was a complete wave of larger degree.
There is further corroborating evidence. Waves 1 and 5 are similar at +106% and +115%, a usual EW feature. Wave 3 should be the longest wave, and it is at +171%. In addition, if one multiplies the gain in wave 1 of +106% by 1.618 it produces 171.5%, exactly the gain in wave 3. These relationships are evidence that the rise from $4.02 to $20.68 is a completed impulse wave and that we can call it Major ONE.
Having completed this 5 wave up move, the next correction in Major TWO would be expected to be one degree larger than the two corrections of 33.7% and 35.9% in Major ONE. As shown on the chart, Major TWO declined from $20.68 to $8.77, a loss of -57.6%. The two corrections of 33.7% and 35.9% are close to the Fibonacci 34. The next higher number in the sequence is 55, close to the actual decline of 57.6% in major TWO. Incidentally, if we take the 35.9% decline and multiply it by 1.618, it gives a figure of 58%, very close to the actual decline of 57.6%.
These relationships suggest that silver has completed the same shaped bull market as gold has and that it is at the same stage in its development. Thus silver has probably also completed the first intermediate up wave of Major THREE, in this case from $8.77 to $49.52, a gain of +$40.75 or +464% and has also completed intermediate wave 2 of Major THREE, being the decline from $49.52 to $26.39 or -47%.
How does this decline of -47% measure up in terms of EW relationships? As with gold, where the corrections in Major THREE were shown to be larger than the corrections in Major ONE, the same applies to silver. The corrections in Major ONE shown in the chart above were close to -34%. If we multiply 34% by another Fibonacci relationship of 1.382 we get 47%!
This is mind-blowing stuff for an analyst who did not believe that EW applied to silver!
We can now attempt to make some price forecasts. Silver, as with gold, is starting intermediate wave 3 of Major THREE, which should be the longest and strongest wave in the bull market. It should certainly be longer than intermediate wave 1 which was the gain from $8.77 to $49.52, or +464%, as shown above.
Thus the gain in wave 3 of Major THREE should be larger than +464%. It should be a gain of at least 500%. Starting from the $26.39 low, a gain of 500% would produce a target price of $158.34 for silver. That is the number which equates with the $4500 price forecast for gold and produces a silver to gold ratio of 28.4 ($4500 divided by 158.34).
The gain in gold was forecast to be 200% for this move while the forecast rise in the silver price is 500%. Silver is again predicted to perform better than gold based on these EW calculations.
A word of caution is appropriate at this stage. All EW studies are based on probabilities. While the wave counts may provide a high degree of confidence in the forecasts, one cannot be 100% certain of any forecast. It is necessary to have a point at which it is obvious that the forecasts are wrong. In the case of this silver study, the line in the sand is at $26.00. If the silver price drops below $26.00 the odds are that the above calculations will not work out.
A further word of caution: silver is not for the faint hearted. Silver is considerably more volatile than gold and the corrections are much larger. Silver corrections can and do happen quickly. They are emotionally gut-wrenching and it is easy to get shaken out of one’s position near the bottom of a large correction.
Alf Field
1 February 2012
Comments to ajfield@attglobal.net
Disclosure and Disclaimer Statement: The author has personal investments in gold and silver bullion, as well as in gold, silver, uranium and base metal mining shares. The author’s objective in writing this article is to interest potential investors in this subject to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions. The author has neither been paid nor received any other inducement to write this article.
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