There has been lots of gnashing of teeth out there in Forum land about what’s going on in silver. Here is my take on it. Silvers notable underperformance to gold lately is consistent with what the rest of the general stock market has been broadcasting. And that is that we are in the early stages of a financial crisis. That’s what silver does in a financial crisis, it underperforms gold. The Gold to Silver ratio actually performs like a credit spread. It predicts the onset of the crisis before it occurs and can be used as a heads up before its onset. Gold is more liquid than silver so it is more sought after than silver so in a credit crisis the GSR rises. Thats why we reached a peak in the GSR during the Citicorp technical bankruptcy of 1991 and in the crisis of 2008/9. Its a reflection of financial stress. Here is a roadmap of past GSR readings.
So the weak silver price is in concert with what I see the rest of the market telling us right now. And that is that the top is in, we are now seeing a failing rally in the general stock market which is part of the topping process. The top out parade is now marching right before our eyes. The small caps in the Russell 2000 went first and now we are seeing the Dow and S&P top out. It appears we may still see a new high in the tech sector as the QQQ still has lots of internal strength. Here is the daily and weekly of the GSR. Note it is trending higher and if it exceeds 67 it sets the trend to a higher high and will be announcing financial stress in the system which may be the advent of a financial crisis.
Let’s take a look at the major averages and note how this current snap back is occurring on declining volume and looks to be building out a bearish rising wedge or flag.
Now step back and view them from a daily perspective where one can clearly see the fading volume
Now from a weekly perspective note the weekly stochastics show how momentum is deeply entrenched in a downward move and we are simply in a snapback mode. Note the exception of the QQQ where internals allow a move to new highs.
As mentioned we are witnessing a top out parade, which is part of the topping process, it happened in 2000 and 2007 and its happening now. As I mentioned the Russell lead first, and across the pond Europe has busted loose to the downside also:
Here is something to watch the Advanced Decline line. Note it has dutifully confirmed each new high of the averages in this cyclical bull market. But now it has dropped off after peaking one month before the S&P. It is key to watch if it can go on to a new high after this pull back. Note at the end of the big 26 year secular bull market in 2000 it peaked 17 months before the S&P peaked. In 2007 it peaked 4 months before the S&P. Maybe this time it gives even less notice? Let’s keep watching this. A/D-red, SPX-green
As far as commodities confirming a deflationary impulse within a credit contraction let’s take a look at em. Also note the early fall off of oil prices and especially gasoline at the peak of summer and before the end of summer labor day peak driving season!
Now CRB,CCI,and Corn, Livestock
Finally, let’s look at the real price of gold. The best I can offer as a measure is gold divided by the CRB. So we are looking at a relative index of gold vs. the cost of other commodities. It has declined steadily since the beginning of this bear market in 2011. That’s what it is supposed to do by the way. But look, since early June it has reversed course and has been trending upward. Similarly, that’s just when the gold stocks started their advance. This makes sense, so the premise is this is what is driving the trend higher. In other words this argues that we have started a cyclical bull market. Personally, I still allow that this is just a rally within the bear market, but I am being open minded here. I understand that if we do have a financial crisis it could be severe enough to drag the PM stocks down to new lows…its a possibility:
Oh, and remember that HUI/Gold ratio which showed that the PM stocks have been underperforming gold itself since 2003, but has now reversed. Well, looks like it just finished up its back test after busting through its H&S NL. As Merrill Lynch used to laughingly say in the middle of a bear market back in 2001 “Be Bullish”!