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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Silver Technicals

Silver is a perpetually fascinating commodity. It shares much in common with the golden king of precious metals, yet it is also quite different in so many ways.

While silver has embarked upon a multi-year primary bull-market journey just like gold, its performance thus far in this young precious-metals bull has unfortunately disappointed some. Bull-market-to-date gold has soared up by 52% trough-to-peak, while silver's bull-to-date gains have lagged rather dramatically at 31% trough-to-peak at this early stage in the game.

Although silver's relative underperformance to gold so far has been frustrating at times, legions of investors and speculators still eagerly follow it and drool over its breathtaking potential. Silver is generally a far more volatile market than gold, and while it can slumber for a long time, once it decides to finally move it really moves!

Silver gains in history during episodes of widespread precious-metals enthusiasm tend to dwarf gains in gold. Investors and speculators blessed enough to have even modest amounts of capital deployed into silver-related vehicles when silver decides to finally erupt can earn great fortunes. These legendary gains always potentially just over the horizon in silver are the primary factor that keeps its seductive allure alive even during its long quieter seasons.

While a great deal has been written about the bull market in gold, today's bull market in silver has even far greater potential. The reasons behind silver's massive potential gains when capital really starts pouring into the precious-metals arena are well known and widely discussed.

Unlike gold, central banks are not sitting on well over a decade's worth of total global mined silver production in vaults. There is no massive supply overhang of silver threatening its progress like gold. When silver starts galloping, there are no huge stockpiles that can be called upon to meet soaring demand. Once the silver rocket leaves its launchpad, it has no brakes to slow its glorious ascent!

Unlike gold, very few primary silver mines exist on Earth today. The vast majority of global silver production today is simply a byproduct of base-metal mining, so even skyrocketing silver prices are unlikely to immediately spur higher silver production for the majority of operations just mining it as a byproduct. Silver mining supplies are restricted over the short-term almost regardless of how high silver runs.

Unlike gold, silver is an extremely critical metal for all kinds of high-tech computer-age manufacturing applications. Industrial demand for silver is large and growing every year with the proliferation of new computing and communications devices. And as all of these high-tech tools and toys each individually use only trivial amounts of silver, even a gargantuan increase in silver prices will probably barely dent global industrial demand. Silver industrial demand is voracious and growing almost regardless of how high silver runs.

Unlike gold, the silver market is very small and relatively thinly traded. There is simply not much room in silver for new capital. So once precious-metals fever catches on with the populace again, and speculative fury spills into the metals, the deluge of new capital into silver will be relatively enormous and catapult its prices to record levels that few can even imagine today.

All-in-all, the bullish fundamental case for silver far outshines that of its more popular sibling gold. Silver's lackluster performance to date notwithstanding, once capital starts competing for very limited silver the white metal will almost certainly soar and leave gold far behind in the dust.

While the long-prophesied explosion in silver could certainly erupt anytime with little advance warning, so far in its young bull market silver has richly rewarded the gunslinging speculators. Its total gains have not been stupendous yet, but its great volatility has yielded some incredibly profitable trading swings in recent years. As an example of this, in our Zeal Intelligence newsletter for our subscribers, we have already traded in and out of one particular elite silver stock multiple times in recent years, for +47%, +90%, +30%, and +43% realized wins.

Although silver has always been near and dear to my own heart, I have not penned many essays on it since I presented the extremely bullish fundamental case for it in "Lagrimas de la Luna" several years ago. There are several reasons for this long drought of Zeal essays on silver specifically.

First, silver tends to move in lockstep with gold so we have been able to successfully piggyback our actual silver-related trading on top of our gold analyses. Second, since silver is such a tiny market it is challenging to uncover good solid information, not mere rumors and innuendo, about what is really going on in the silver world at any given time. Third, since silver's performance has lagged gold there has just not been much excitement surrounding this precious metal yet.

And last but not least we hadn't yet internally developed any particularly useful trading tools for silver and silver stocks specifically. Recently however I had written about some gold trading tools we developed and are using in actual real-world speculations today, the Gold 50/200 MACD and the Relative HUI, and lots of good folks wrote in and wondered whether they would work for silver as well.

This week I would like to take a look at the applicability of these pure technical moving-average-related trading indicators that we developed for gold instead applied directly to silver itself. The results of our initial inquiry into this line of research this week were certainly interesting and I am very grateful and thankful to all of you who wrote in and suggested that we take a look at this.

As always, it is best to begin with the strategic overview of the bull market in silver compared to the bull market in gold so we can embark upon our silver research with the benefit of the proper perspective.

Since silver and gold are both precious metals, it is not at all surprising that they tend to correlate quite well. When gold is shining odds are silver is rallying too, and when gold is suffering silver generally joins it in the gutter. This graph really helps illuminate why we have been blessed with success in speculating in silver stocks while using pure gold analysis as the structural backbone for our actual trading timing decisions in recent years. Most of the time, as goes gold so goes silver.

While its bull market has been more modest than gold's so far, silver's bullish uptrend is now very well-defined thanks to the recent interim silver highs of early September. Silver has conveniently made multiple trips to both its strong lower support line and its current overhead resistance, granting technical analysts a nice trend channel to ponder. Yes, this trend pipe is wide and silver is phenomenally volatile within this channel as always, but still in the grand bullish scheme of things the silver price is behaving quite well.

Now while technical analysis, looking at silver prices alone, is no substitute for the fundamental analysis I discussed above, it is nevertheless an important factor to consider. Technical and fundamental analysis compliment each other and always go hand in hand.

Fundamental analysis is sweeping and strategic in nature, absolutely necessary to let investors and speculators know whether silver should be in a bull or bear market based on its supply and demand fundamentals. Since fundamental analysis only focuses on the giant economic picture however, it is not very useful for making actual real-time trading decisions within silver's bullish uptrend.

This is where technical analysis, which is short-term and tactical in nature, absolutely shines. It zooms in within the context of sound fundamental analysis and fills in the gaps for speculators. Analyzing silver prices alone in isolation is necessary if one is to develop a sound basis for executing high-success-probability real-world trades in silver and silver-related vehicles.

Fundamental and technical analysis are two sides of one market coin. Fundamental analysis helps answer the grand "why" question, why is silver in a bull market. Technical analysis then zooms in next and addresses the crucial "when" question, when should I buy or sell silver speculations in order to attempt to realize profitable trades?

Our pair of gold trading tools that we want to apply to silver this week, the Silver 50/200 MACD and Relative Silver, are purely technical, based entirely off of silver prices alone. Yes, we know silver is in a bull-market season fundamentally, but how do we trade it and make educated guesses about tomorrow's silver price? Some potential insight may lie in the fascinating interaction of silver with its two key moving averages, the 50-day and 200-day.

In the graph above you can observe the raw data, the volatile oscillations of silver relative to its two major moving averages. While the interaction of the blue silver line and its white 50dma and black 200dma lines is visually interesting, our human eye can't precisely mathematically quantify these sometimes subtle relationships. Using some simple math and our gold tools however, we can empirically lock down these fluctuations and read them off of a common base, making them much easier to interpret.

Our first pure technical tool to apply to silver today, the 50/200 MACD, (Moving Average Convergence Divergence) was explained in depth in my recent "Trading the Gold-Stock Bull 2" essay if you are interested in some deeper background information. In a nutshell, the 50/200 MACD simply divides a 50dma by a 200dma and converts the quotient into a percentage. When applied to silver, the result tells us how far silver's 50dma was above or below its 200dma in percentage terms at any given moment in time.

As I explained in my earlier essays on these gold tools, using percentages is crucial to remove visual skew as the silver bull market grows in strength, since percentages stay constant over time even as the underlying silver prices meander higher. A 10% gain in silver is always a 10% gain in silver, whether it blossoms from a $4 base or a $15 base price in the white metal. The Silver 50/200 MACD grants us an easy visual way to see a faithful and comparable representation of the interrelationship of silver's key moving averages over time regardless of the prevailing silver prices at any given moment.

Unlike gold which has so far tended to stay above its own 200dma in its gold bull to date, silver's immense volatility carries it all over the chart relative to its black 200dma line. As such, before we created this graph I was pretty skeptical about the usefulness of running the 50/200 MACD indicator on silver. Interestingly however, the Silver 50/200 MACD actually did manage to salvage some structure out of silver's volatility and make for a potentially useful trading indicator.

The light blue line above represents the Silver 50/200 MACD and yields some excellent timing clues. The whole goal of technical analysis is to define relatively good moments in time to buy or sell. While speculators always eat this stuff up, even you dedicated long-term buy-and-holders ought to pay attention here. The Silver 50/200 MACD also offers some great insights into high-probability moments to buy silver and silver stocks at lower points during technical weakness to add to long-term positions.

If you look at the lower portion of this chart first, under the dark gray 0% line, the Silver 50/200 MACD has tended to bottom between -1% and -3% so far in its young bull market to date. This means that silver has generally traded low enough for long enough that its 50dma trades between 1% and 3% under its 200dma before another silver upleg commences. The implications of this simple observation are obvious.

If you want to buy silver, silver stocks, silver futures, silver options, whatever, your best bet is to patiently wait until the Silver 50/200 MACD slides under zero. The lower this indicator gets, the stronger the buy signal. Naturally this pure technical buy signal applies to both short-term speculators and long-term investors, as buying at naturally low points is super important for the long-term as well and can dramatically multiply one's ultimate realized returns.

Conversely, on the high side of this chart, so far in silver's young bull its 50/200 MACD has not migrated far above 6% to 7%. If you are holding short-term speculation positions in silver-related vehicles and you witness a Silver 50/200 MACD greater than 6% or so, it is probably a good time to consider either ratcheting up your stop-losses or selling outright. Caution is in order whenever silver's 50dma manages to charge more than 6% above its 200dma.

So, from a Silver 50/200 MACD perspective, silver investors and speculators want to wait to add new long positions until the Silver 50/200 MACD trades under 0%, preferably down to the -1% to -3% range indicating relatively low silver prices. And after the ensuing silver upleg runs, the gunslinging speculators ought to prepare to sell once this indicator moves above 6% or so.

The Silver 50/200 MACD is a simple indicator that yields simple rules, but it is very useful as it helps filter out our own dangerous human emotions in favor of pure technical math. When silver is undervalued relative to its key moving averages, odds are a good time to buy is at hand. When silver grows overvalued relative to its key moving averages, it is probably a good time to think about selling.

My only caveat about using this tool in your own trades it to remind you to please realize that the silver bull market remains young and we really don't have a lot of data yet. Blossoming well after the gold bull launched, the silver bull's two-year anniversary won't even be upon us yet until Thanksgiving time, so please remember that the Silver 50/200 MACD is applied to less than two years of bull-market data here. Nevertheless though, even in its short lifespan so far the Silver 50/200 MACD looks like a useful technical tool for speculators to consider when making timing decisions on silver entries and exits.

Finally, it is interesting to note that the Silver 50/200 MACD today, at around 6% or so, is on the high side of its recent historical range. While I love silver stocks and am looking forward to buying on relative weakness, current conditions based on this indicator certainly do not suggest that now is an ideal time to buy. On the contrary, stop-losses should be tight and caution in order as silver may need to consolidate after its awesome upleg of last quarter.

Our second gold technical tool applied to silver is based on the Relative HUI concept, which I explained in depth in my "Trading the Relative HUI" essay. It involves taking a price and dividing it directly by its own 200dma. The resulting quotient shows where the price is trading relative to its own 200dma at any given time and also eliminates chart and price skew.

Ideally I would like to see this 200dma relativity idea applied to a pure silver-stock index, but unfortunately I am not aware of a suitable candidate. To the best of my knowledge there really aren't any popular and respected mainstream indices that focus exclusively on silver stocks alone. Several research boutiques are developing proprietary silver-stock indices that are promising, but unfortunately for now silver stocks really don't have their very own index to call home.

As such, we applied 200dma relativity to the silver price directly for our next chart. If a silver-stock index rises to widespread acceptance in the coming years, which I suspect will happen, we will shift this indicator away from silver itself and use the silver-stock index.

Incidentally we did run these charts on most of the elite silver stocks individually this week as well, but the various single-stock charts were really volatile and different enough that it was evident a true silver-stock index is really necessary to complete this analysis. For now though, behold Relative Silver!

Trading on the Relative Silver indicator is a lot like trading on the Silver 50/200 MACD. The beauty of this simple math is that it removes chart and price skew and gives us a hard comparison of the silver price to its 200dma over time. A 1.00 reading indicates that silver is currently trading at its 200dma, while a greater than 1.00 reading indicates that silver is forging above its 200dma. A sub-1.00 reading, of course, indicates that silver is trading under its 200dma.

Once again the bottom of this chart yields our buy-side technical entry signals. Generally silver gets interesting as it heads below its 200dma at 1.00, but really strong buys seem to occur at a Relative Silver 0.95 range, when silver is trading at 95% of its 200dma. Investors and speculators buying anytime in this silver bull to date when Relative Silver headed under 0.95 were soon richly rewarded as exciting new silver uplegs exploded higher.

On the sell-signal side of this technical equation, so far a Relative Silver reading above 1.10 has warranted caution and the raising of stops if not outright selling. Each time the price of silver managed to trade above its 200dma by 10% or more, its current upleg seemed to be running out of steam and limping along on borrowed time.

So, according to Relative Silver, silver investors and speculators ought to be throwing long when this indicator heads down around 0.95 or so. The speculators then should consider preparing to get out of Dodge when Relative Silver heads above 1.10 or so. Once again this simple technical tool yields simple and consistent technical guidelines to help investors and speculators decide on tactical execution timing within a strategic bull market.

Provocatively, at around 1.04 today, Relative Silver at the moment is roughly midway between its strong buy levels at 0.95 and its raise-stop levels above 1.10. Based on this indicator, if you have current silver-related positions you probably want to hold them if you haven't been stopped-out yet, but if you are waiting to deploy fresh capital now does not look like an ideal time. Relative Silver is basically neutral today, a hold.

While these gold tools applied to silver are certainly interesting, I do have to close with a pair of caveats.

First, as I mentioned above, the silver bull isn't even two years old yet so there really isn't a great deal of data to define relative technical high and low points yet. The Silver 50/200 MACD and Relative Silver indicators may grow into fine tools, but for now they should be used cautiously as simply a couple more input points for investors and speculators to consider before making actual real-world trades.

In this vein, we will be considering the Silver 50/200 MACD and Relative Silver as we execute actual future real-world silver-stock trades for our Zeal Intelligence newsletter and Zeal Speculator alert service subscribers. We will also be actively working at Zeal to refine our silver trading models and add new indicators to the mix, as well as adjusting these two covered here today as more data pours in.

Second, speculation is always risky on multiple fronts! If you want to trade silver or silver options or silver stocks, you have to fully realize and completely accept the fact that you just may be caught outside of your positions if silver explodes without warning someday out of the blue. If you cannot accept this risk of missing The Big One, then don't trade silver-related speculation vehicles!

Or you could do as I personally do, always have some long-term investment capital committed to physical silver and silver stocks while at the same time maintaining a completely separate short-term portfolio to be used for silver speculation. This medium-risk strategy always maintains core long-term long silver exposure, while at the same time granting one the chance to realize excellent trading gains. I continue to discuss these strategies as they evolve in our newsletters for our subscribers.

The bottom line is that the Silver 50/200 MACD and Relative Silver technical-tool concepts look interesting at this early stage and have excellent potential. It will be exciting to see how these indicators hold up and evolve as the awesome young silver bull market continues to unfold.

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