Some Comments On The Blow-off Rally In Silver

The near parabolic rally in silver has continued with some verve, probably surprising bulls and bears alike with its persistence. Silver has now achieved a positive close in 13 of the past 14 weeks, rallying from a mid January low of just above $26/oz. to an intraday high at just below $50/oz., closing last week at $47.87.  The long term target of $55/oz., which we mentioned as 'a potential long term target (see this chart from a previous update; at the time we said: 'we'd be surprised if it gets that far in this move') has in the meantime become a possible short term target. However, it should be noted that the old high at just below $50/oz. from the 1979/80 Hunt silver corner  rally represents formidable technical resistance. The market has an 'elephant memory' when it comes to old highs or lows, even if they have been made more than thirty years ago and are merely nominal prices that do not reflect the true inflation adjusted height attained at the time.


As a general remark on blow-off rallies in commodities: a few weeks or even a few days can make a very big difference with regards to the final price high attained, as such rallies always tend to accelerate in their final stage. One of the warning signs usually indicating that the final stage is underway is a sharp increase in short term volatility, which could certainly be observed in silver lately.



A weekly chart of silver (continuous contract chart) – the metal has closed higher in 13 of the past 14 weeks. Although it is very 'overbought' with the weekly RSI at 88.65, there is as of yet not technical sell signal in evidence on the weekly chart – click for higher resolution.



Silver, daily. One the daily chart, we see a small RSI/price divergence that has formed during the volatile trading last week. The chart indicates the days when the CME increased silver futures margins. As can be seen, the first margin increase led to a sharp increase in intraday volatility – click for higher resolution.



Although all that can be ascertained from a technical perspective in terms of the action in silver itself is that the market is severely overbought, there are now a number of other warnings signs in evidence as well.

Among these the most glaring one is the severe underperformance of silver mining stocks compared to silver itself. This is a sign that the market does not regard the current silver price as sustainable. Of course the market could err, in which case silver mining stocks would likely 'catch up' with silver's price at some point. However, we regard that as a low probability outcome in the near term. Longer term the silver mining stocks may well resume their advance if the market becomes comfortable with silver trading in a higher range.



The ratio of the silver mining shares ETF SIL to silver, vs. the price of silver itself (solid black line). Silver mining stocks have severely underperformed silver in the most recent phase of the rally – click for higher resolution.



Another – as of yet subtle – warning sign is that late last week, gold has begun to outperform silver. The current rally phase will likely end after a number of divergences are in place, one of which would be a new high in gold accompanied by a lower high in silver and/or the silver-gold ratio.



The silver-gold ratio, short term. The same RSI divergence visible on the daily chart of silver is in evidence here as well. However, the recent dip in the ratio may still turn out to be another routine pullback – it is too early to tell for sure, although we personally think that gold is likely to outperform silver for a while – click for higher resolution.



A longer term chart of the silver-gold ratio gives some perspective of how extreme moves in silver relative to gold can become. Note the plunge in the ratio in 2008 as economic confidence evaporated. In this sense, the recent rally in the ratio can be seen as representing a surfeit of economic confidence that is a bit at odds with economic reality – click for higher resolution.



A very long term chart of the inverse of the ratio shown above, the gold-silver ratio. As can be seen, it has now reached a level of support established in the early 1980's at about 32, but is still far above the 1980 low in the 17 area – click for higher resolution.



As noted in the chart of silver above, the CME has increased initial and maintenance margins for silver futures twice last week. Such margin increases often precipitate short term price volatility, as they make life more difficult for futures traders that are sailing too close to the wind and do not possess the financial wherewithal to maintain their positions under more onerous margin requirements. Total open interest in silver futures at the COMEX has remained fairly stable in recent weeks at just above 143,000 contracts, but large speculators have begun to sharply reduce their net long positions while commercial hedgers have concomitantly begun to reduce their net short positions. This means that the most recent leg up in prices was driven by commercial short covering rather than speculative buying. We regard that as a  warning sign as well. The phenomenon of shorts covering their losing positions often occurs in the final stages of a rally.



Silver futures, commitments of traders – recently large speculators have markedly reduced their net long exposure, while commercial hedgers have covered some of their short positions – click for higher resolution.



Lastly, a few words regarding silver's fundamentals. Silver is different from gold insofar as it has a relatively large industrial demand component. The most recent data on mine and scrap supply compared to industrial and fabrication demand show that silver is in a slight primary surplus this year. It is therefore clear that investment/monetary demand is the primary driving force behind the recent rally.

Many of the known above ground inventories held by governments and other identifiable repositories of tradable silver for investment purposes (i.e., silver in bar and coin form) have declined quite a bit over recent decades, as silver was in a primary supply-demand deficit for most of the period 1980 to 2010. A large amount of silver hoarded during the 1970's bull market by investors has been 'used up' in industrial applications during that time period. However, with investment demand on the upswing for the past several years, a lot of silver has begun to flow in the other direction again and is once again hoarded by investors – whether as backing for silver ETFs or as coins and bars bought by private investors. There is certainly no 'shortage' of silver, just as there can never be a 'shortage' of gold. It is precisely because a large above ground supply of these metals exists that they are useful as monetary commodities.

Bob Moriarty has recently published an editorial at 321gold that takes issue with the shortage claims. While we can not vouchsafe for the numbers cited in his article, we agree that one should discount some of the wilder claims that have been made by some market observers. With money priced close to zero by the Federal Reserve there is very good reason for the price of silver to increase, but the world is certainly not running out of the stuff.

Needless to say, we also agree with Moriarty that anyone who claims that 'it's different this time' should be roundly ignored. It never is.

Alas, we certainly would refrain from 'picking a top'. While there are a number of warning signs (see above) that indicate that the current rally may be close to a correction, picking tops is usually a fool's errand.

The 1979 rally in silver showed how dangerous trying to pick the top of a blow-off rally in the metal can be. As Sam Kirtley notes in a recent commentary at Kitco, the 1979/80 rally was five times as fast as the recent rally in silver. This is illustrated by a long term 100-day percentage change chart that Mr. Kirtley presents in his commentary:



Silver's 100-day rolling percentage change – note that both the 1974 and the 1979/80  rallies experienced a sharper rate of change than the recent one. Of course these were exceptional events – however, we will only know for certain in hindsight just how exceptional an event the current rally is – click for higher resolution.



Gold – The Rally Accelerates

Gold's advance has so far been fairly orderly and tame compared to silver's, but late last week this appeared to change. While silver 'paused' on Friday in the wake of the second margin increase, the rally in gold accelerated with a $25.20 jump to  $1556.40 at the COMEX settlement, later adding another $9.30 in GLOBEX trading  to go out at $1565.70/oz. – a new all time high.

We wouldn't be terribly surprised if some big traders were switching from silver to gold in the belief that gold's short term upside potential is now greater. In fact, looking at the FMX gold options reports from April 27 and April 28, a big buyer of the August 1600 call strike has patiently used every dip to increase his position last week. By Friday's close this buyer was already well rewarded, but calls remained active and well bid on Friday as well (the June 1550, 1575 and 1600 strikes as well as the August 1650 strike were the most active).



Gold, continuous contract, daily. Last week the rally accelerated, culminating in Friday's big gain to a new all time high. Note that the HUI index of unhedged gold stocks has so far failed to confirm gold's breakout – more on this further below – click for higher resolution.



While the persistent decline in the dollar's exchange rate seems to be a major driver of the recent rally, it is noteworthy that gold has broken out to new high ground in several other major and minor currencies as well. Notable exceptions are gold in euro terms and Australian dollar terms. In the euro's case, the bout of euro weakness in the summer of 2010 created a spike high that has just been bested for the second time, but the price is still slightly below the high reached in late 2010. The Australian dollar meanwhile has been exceptionally strong in recent months and weeks – in terms of this 'commodity currency', gold has yet to overcome the high it made in early 2009. However, even in terms of the currencies in which gold has yet to reach a new high, its chart tends to look quite constructive. In fact, gold's advance in non-dollar currency terms continues to proceed in a very orderly fashion.



Gold priced in pound sterling – a new all time high has been reached last week – click for higher resolution.



In terms of the Japanese yen gold is at a new high as well – click for higher resolution.



Gold in Canadian dollar terms – ending the week at a new all time high as well – click for higher resolution.



Gold in terms of the South African Rand – this is another recent instance of gold managing to attain a new all time high in terms of a so-called 'commodity currency'. This is a great boon for South Africa's marginal gold producers, which have been struggling with rising costs amid a strong Rand – click for higher resolution.



Gold in terms of the Australian dollar – it has not yet overcome the highs of early 2009 and mid 2010, but the chart nonetheless looks constructive – click for higher resolution.



Gold in terms of the euro – it is not far from a new all time high, but slightly higher daily closes (at around € 1,070/oz.) were recorded in late 2010 and early January 2011 – click for higher resolution.




Gold Mining Stocks

Unfortunately, gold's recent rally is at present still marred by a glaring non-confirmation from the gold mining stock indexes. In the early days of the bull market (2000-2003), such a non-confirmation was a sure sign that the rally was about to end and give way to an intermediate term correction. These days things are no longer so easy. While in the early stage of the bull market, gold stocks tended to both lead and strongly outperform the price of gold, they are nowadays lagging gold and have roughly performed 'in line' with the gold price since early 2009. The sector requires careful stock picking these days, as a handful of individual issues have performed much better than the universe of gold mining stocks as a whole.

This has resulted in a bifurcated market, which has left some stocks overbought, while a great many others seem to offer good value, but have strained the patience of investors by their distinct lack of performance.

The HUI and XAU indexes both still trade slightly below their highs reached in December of 2010, as though they were reflecting gold/euro rather than the US dollar gold price. Over the past two years such divergences have often, but not always, resulted in short term corrections.  This time  the gap between the dollar gold price and the gold miner indexes has become exceptionally large. Since it still would not take much for the indexes to remove the divergence, it is not yet certain how meaningful it is. The longer the divergence persists, the more likely it will be that it represents a warning sign.



A short term chart of the HUI-gold ratio vs. gold (solid black line). For the past three weeks, gold stocks have strongly underperformed the price of gold – oddly this has not coincided with a correction in gold, but rather a strong rally, which differentiates this particular episode from previous declines in the HUI-gold ratio – click for higher resolution.



A longer term chart of the HUI-gold ratio shows that the ratio has been largely going sideways for the past two years, within a channel ranging from 0.34 to 0.44. The ratio is currently approaching the upper rail of a layer of support – click for higher resolution.



A daily chart of the HUI index, with three divergences with the price of gold indicated by the blue dotted lines. Usually a short term correction follows after a divergence has  occurred, but the index is at the moment not too far from reaching a new high. The green dotted line represents very short term lateral support and currently coincides roughly with the level of the 50 day moving average – click for higher resolution.



The weekly chart of the HUI looks very similar to the chart of gold in most non-dollar currencies, which suggests that the index is now reflecting the 'world gold price'  rather than the dollar gold price – click for higher resolution.



Below are a few charts of gold mining stocks that we have either discussed previously or that have recently caught our eye. The shares of the two most marginal  South African producers have fared quite well recently, inter alia as a result of the strong showing of the Rand gold price. SA's gold producers are currently enjoying lower winter tariffs for electricity as well, which greatly benefits their margins.

In the case of Harmony (HMY), the market has accorded the stock a higher valuation on account of the previously discussed (scroll down) discovery of the high grade Wafi-Golpu gold-copper porphyry system in Papua New Guinea (a.k.a 'the gold strike of the century'). The most recent company presentation about the discovery can be found here (pdf).

The most marginal of the major gold producers in South Africa, Durban Deep, has recently announced it plans to sell its sole remaining underground operation Blyvooruitzigt in order to concentrate entirely on the higher margin 're-mining' of the gold sand and slime dumps in the Witwatersrand basin. This would lower the company's risk profile, but at the same time remove some of its 'optionality' (since Blyvooruitzigt is barely profitable at the current gold price, its earnings leverage to the Rand gold price is quite remarkable).

In any case, the market evidently took the announcement as a positive event.



South African miner Harmony gold – profiting from both its PNG discovery and a higher Rand gold price – click for higher resolution.



Durban Roodeport Deep – advancing on the back of a higher Rand gold price and its announcement that it intends to become a pure surface gold producer by selling its last remaining deep level hard rock mine – click for higher resolution.


The gold exploration sector offers a wide variety of choices. Given the need of established producers to replace mined out reserves, successful explorers in mining-friendly jurisdictions are generally trading at a premium. Our former favorite in this sub-sector, Fronteer Gold (FRG) has been taken over by Newmont Mining, but the firm's management has remained with the smaller exploration vehicle that has been spun out from Fronteer after the takeover (Newmont evidently was only interested in Fronteer's key Nevada assets and the bulk of the company's cash pile). The rump entity is called Pilot Gold and trades at the TSX under the symbol PLG.  We have previously also mentioned Keegan Resources (KGN) that has made a large and still growing bulk-mineable discovery in Ghana. Following a large bought deal financing in January, the company boasts a strong balance sheet allowing it to pursue development of the project. After a temporary setback due to the financing, the stock is back at its recent highs, a sign that the market continues to have a very positive view of its main project (named Esaase). A pre-feasibility study is expected to be released soon.



Keegan Resources (KGN) trades near its recent highs after a brief setback earlier this year on account of a bought deal financing – click for higher resolution.



Among other exploration stocks that we consider high quality is Tower Hill (THM, Amex), which has discovered a 10m. oz.+ ore body near Fairbanks in Alaska (named Livengood). South Africa's Anglogold holds a 10% stake in THM and has so far regularly made use of its 'topping up' right to keep this stake constant over time.

Tower Hill  has already released a preliminary economic assessment study that considers a range of options for an eventual mining operation, with different capex requirements and output.  From this PEA it certainly appears to be an economically viable project at the current gold price. THM has in the meantime  continued to drill the property, with the aim (successful so far) of establishing the presence of higher grade ore (pdf) both near surface and at depth, which could improve the economics of the project further. This is certainly a discovery that both in terms of its size and location should be interesting to a senior producer. Obviously, Anglogold is most likely to eventually express such interest, given its existing 10% stake in THM. The stock has largely been going sideways in recent months, a fate it shares with most exploration stocks.



THM – following the advance last fall in the wake of the release of the PEA on the Livengood property, the stock has been consolidating in recent months – click for higher resolution.



Two smaller exploration stocks that have caught our eye are Midway Gold (MDW) and Goldgroup Mining (GGAZF, GGA in Toronto). What piqued our interest is that insiders are holding fairly large stakes in both companies, both have had some exciting exploration news in recent months and their charts look strong – usually an ideal combination of factors.

One must of course caution that all these stocks have already advanced quite a bit and within the gold sector the exploration sub-sector is certainly the most risky. The higher risk is however compensated by higher potential reward.



Midway Gold – insiders hold about 15% of the company, it has been quite successful with exploration – mainly in Nevada –  and the chart looks strong – click for higher resolution.



Another strong, although far less liquid gold exploration stock – Goldgroup Mining, which is exploring for gold in Mexico – click for higher resolution.



Kinross Gold (KGC) is currently probably the most undervalued senior producer stock in North America and thus far remains steadfastly in the doldrums. Many people have been quite critical of the company's acquisition strategy, complaining that management has unreasonably diluted its shareholders for a relatively small increase in production. This is certainly true for the moment, but one must not forget that one of the assets acquired in the Redback takeover – the Tasiast mine in Mauritania – will eventually become a flagship property for the company and produce at a far higher output rate than at present. Recently KGC has also acquired the 25% of the high grade Kupol property in Russia hitherto held by the Chukotka Oblast government, bringing KGC's ownership stake to 100%. Be that as it may, the stock hasn't been going anywhere but down over the past year. John Paulson's hedge fund holds a large stake in Kinross, but so far has little to show for it. As we noted before, it is hard to say when the market will reassess the stock's prospects, but the company will report its latest earnings results on Tuesday, which represents the next potential catalyst, provided the market likes what it hears (the last earnings report was met with disappointment due to lukewarm guidance).



Kinross Gold (KGC) – still shunned, the stock has been one of the worst performing senior producer stocks. At some point the market should give it credit for the upside potential of its project pipeline – hopefully before the gold bull market takes a rest – click for higher resolution.



Platinum Group Metals

A few technical observations on the platinum group metals follow below. After underperforming palladium for two years, Platinum seems to be bottoming out relative to its sister metal. There have been recent reports of major bullion banks taking delivery of physical platinum – whether for their own books or on behalf of clients is not quite clear, but the fact remains that such delivery demands have markedly increased.

Platinum has closed last week at the highest level since the early 2008 spike high that occurred in the wake of an electricity supply crisis in South Africa.

Interestingly, late last year platinum was expected to show a slight primary supply-demand surplus in 2011, vs. an expected supply shortfall in palladium. Nevertheless, platinum has recently begun to perform better. It seems possible that investment demand for platinum has been underestimated in these forecasts (it was expected to fall slightly this year).



Platinum futures end the week at $1,870/oz., the highest level since the 2008 spike high – click for higher resolution.



A monthly chart of platinum shows where its price currently is relative to the 2008 spike high – click for higher resolution.



The ratio of platinum to palladium appears to be bottoming after a two year long downtrend – click for higher resolution.



The stocks of the two major North American primary platinum group metals producers have been correcting in recent months and are recently bouncing again. Note that these producers (North American Palladium and Stillwater Mining) primarily produce palladium, with platinum, gold and nickel as byproducts. It is too early to say whether they will resume their rally – we recommend watching how they act relative to palladium, as indicated in the chart of PAL below:



PAL (North American Palladium) – the stock as well as its ratio to palladium are just below a level of near term resistance after correcting last year's advance – click for higher resolution.



The chart of SWC (Stillwater Mining) looks very similar and its ratio to palladium rests likewise just below trendline resistance – click for higher resolution.



1.    Credit Rating Hilarity

Weiss Ratings, hitherto known for rating the creditworthiness of financial institutions, has begun to issue sovereign credit ratings on 47 countries. Ratings range from 'A' to 'E' with further differentiation achieved by adding a + or a – sign to a letter. Hilariously, the United States gets an overall rating of 'C', or 'fair' from Weiss, which puts it on 33rd place on the list – below the rating Weiss accords to Mexico. While Greece's rating of 'E' ('very weak') seems well deserved, we tend to agree with Sean Egan from another independent rating firm, Egan-Jones (contrary to the business model of the other major credit rating agencies, Egan-Jones does not get paid by debt issuers, which makes it free of the conflicts of interest that have bedeviled the rest of the industry) that Weiss' rating of the US is primarily an 'attention-grabber'. As Egan notes:

“Despite high government debt, the U.S. still has attributes that make it more creditworthy, according to Sean Egan, president of Egan-Jones Ratings, a rating agency that’s paid by investors rather than issuers.

“The U.S. is the largest economy in the world, home to most industry-leading firms and maintains the reserve currency of the world,” Egan said. “That provides significant support beyond credit metrics like debt to GDP.”

The Weiss rating is “attention grabbing,” Egan added. “But unless they’re seeing very different things from other people it’s hard to support a C rating.”

In its Thursday report, Weiss gave a C- rating to Argentina, which defaulted on some of its external debt in 2002.

“The U.S. and Argentina don’t usually travel in the same sphere,” Egan noted.

Egan-Jones has a AAA rating on U.S. government debt. But the firm put that on negative watch in early March. That means there’s a “better-than-even chance” of a downgrade within the next six months, according to Egan.”


2.    Healing the Economy

It seems the more Ben Bernanke tries to explain the Fed's actions to the hoi-polloi, the sharper the wind that is blowing into his face.  In a clear sign that the monetary elite has lost some of its power to shape social debate since the advent of the internet, we want to point readers to two recent reports on Bernanke's press conference ('Economy needs more time to heal') and a speech he held in Arlington last Friday ('Bernanke calls for more lending to troubled areas').  Aside from the Fed chief's careful dispensing of the usual pablum, what caught our eye was how people reacted in the comments sections to these reports (we picked the incarnations of these reports at, where readers tend to leave plenty of outspoken comments). It appears from this that among the 'commoners', Bernanke's credibility has reached a new low (at approximately zero). The public relations offensive seems to be backfiring – which we suspect will greatly diminish the Fed's ability to inflate further for the time being (this will likely change again after asset prices correct and the economy clearly heads down again). Even Paul Krugman is complaining about the 'intimidated Fed', a clear sign that the 'intimidators' must be doing something right.


3.    Chart Update –  CDS And Other Charts

Lastly, below is our more or less regular update of CDS prices on European sovereigns and other charts that strike us as relevant. After a strong rise over the previous week, some profit taking has brought CDS spreads back in a tad – however, yields on Greek debt continued to march higher, ending the week at yet another high point, with the 2 year note yielding an incredible 26.77%. Clearly the markets continue to believe that a Greek debt restructuring is more or less imminent – which may be another reason for the recent strength in gold, aside from the declining dollar.  As a brief note on this, talk of such a restructuring just won't die down – as Bloomberg noted over the weekend:

“Greek, Portuguese and Irish bonds slumped, driving yields on the securities to the highest levels since before the introduction of the euro amid mounting speculation Greece won’t be able to avoid debt restructuring.”


We would also like to point readers to a recent WSJ article on the 'Message Of The Bond Market' – similar to the recent divergence between the S&P 500 and weekly jobless claims (when the latter rise, the stock market normally tends to decline, i.e. they are a coincident indicator of the stock market), bond yields have recently declined even as stocks rose further. Often such a divergence is an early warning sign for the stock market.



A close-up of the recently growing divergence between bond yields and stocks, via the WSJ – click for higher resolution.



The S&P 500 Index vs. initial jobless claims (inverted), via Business Insider. There is a strong negative correlation between stocks and weekly claims – recently a notable divergence has appeared – click for higher resolution.



Euro Area Sovereign CDS  (prices in basis points, color coded)


5 year CDS spreads on Portugal, Greece, Italy and Spain – a slight pullback is in train – click for higher resolution.



5 year CDS spreads on Ireland, the senior debt of Bank of Ireland, France and Japan – click for higher resolution.



5 year CDS spreads on Austria, Belgium, Hungary and Romania – all pulling back for now – click for higher resolution.



The Markit SovX index of CDS on the debt 19 Western European sovereigns – pulling back a little after reaching an interim high just under 200 basis points – click for higher resolution.



Other Charts


The yield of Greece's 2 year note reaches a vertiginous new high for the move at 26.77% – click for higher resolution.



5 year CDS spreads on Saudi Arabia, Bahrain, Qatar and Morocco – all are heading lower again, in spite of violence in Syria escalating ever more – click for higher resolution.



The SPX, T.R.'s proprietary VIX-based volatility indicator and the gold-silver and gold-commodities ratios. Along with the recent decline in bond yields, the gold-commodities ratio continues to send a subtle warning sign that not everything is as it should be at the big easy money party – click for higher resolution.



A close-up of the SPX vs. the AUD-JPY cross rate (which we use as an indicator for risk  appetite). Still diverging as well – caveat emptor, as they say – click for higher resolution.



And finally we leave you with a picture that illustrates why the president has recently begun a high profile hunt for 'evil energy speculators', 'price gougers' and other convenient scapegoats, and why Ben Bernanke's inflation denials are generally falling on deaf ears:



Oops! A 5 handle! This may be shocking to Americans, but Europeans can only dream of such low prices.

(Photo source: unknown)



Charts by:, Bloomberg, Software North, WSJ,,, tfc commodity charts



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2 Responses to “Precious Metals And Mining Stocks – An Update”

  • TriggerPoint:

    Interesting how the AUD has not made a new high in Gold. To me that says the AUD is the most over priced paper currency at this time. Interest rate expectations are being mis-priced in Oz. I think a large correction is coming in the Oz, and new highs in Gold before the end of the year are possible.

    Great post by the way.

    I think after any corrections coming in the summer in the wider asset markets will provide a great opportunity to buy Sugar. Everyones focus has been on silver of late.Sugar is really the only commodity that is still nominally below its 1970s high of $0.66.

    Sugar is also down 50% in terms of gold over the last year

    The next large parabolic move could come in sugar?

    • I haven’t really watched the sugar market all that closely lately (thanks for the chart, this sure suggests there is potential), but I certainly agree that the AUD is hopelessly overvalued. It appears to me to be the most risky of the major currencies right now, especially in light of recent reports that the housing market in Australia is coming under pressure.

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