Like my last article on oil and silver, this article also represents an emergency. I'll be succinct. Recently there had been quite a few technical analysis writings done, posted on this and other websites, on silver's "triangle" or "flag" pattern that stretch back almost one year. On a monthly silver chart one can clearly observe, and truly appreciate the clarity, that the flag cleanly starts at the end of March last year. At the end of March this year, the flag pattern has completed one full-year of time span.
I have a few observations to make, in addition to other writers' articles and my former article, "Does Technical Analysis Work in the Silver Market?" ("Silver Market Update" section) where I discussed this flag.
This is perhaps the most important observation that I want to make in this article. Due to time constraint, I'd only touched on it briefly on my silver and TA article.
A flag/triangle pattern's breakouts do not necessarily have to be unidirectional. Sometimes, "zigzags" price behaviors are observed instead of clean breakups or breakdowns.
Suppose silver went down very quickly to its ten-year low at $4.015, say, within three days... Is that bearish or bullish?
What if it heads backup to $7.00 then races up to Ted Butler's price target of $200, with the entire up leg completed within a month or two after the initial three-day "breakdown?"
The above are only a hypothetical scenario, therefore, should not be misconstrued as my forecasts. This scenario is raised to highlight the concept of path dependency. Not only a flag/triangle pattern does not predict the direction of breakouts, it says even less, or basically nothing, about the future price path of interested assets. The flag pattern is non-path dependent. We can have down-first-then-up or up-first-then-down instead of clean up or down breakouts. With a myriad of other possibilities.
The practical concern here is not to sell into an initial panic down leg. Because the bullish fundamentals tell us it can turn out to be a down-first-then-up scenario. Those who sell into that down leg stands a good chance to get filled at somewhere close to the bottom of that leg. This is what flag tells us. Namely, volatility is coming. A trader usually doesn't get "good fills" in a fast market.
Gold is also forming a triangle on weekly chart. Gold's triangle began in the first week of last September and still waiting to be resolved as of today (Saturday April 9th). One can observe this approximately half-a-year long flag on a weekly chart with ticker symbol $gold.
My observation is that in July of 2003, in the heyday of liquidity abundance and carry trade, silver broke out, on the upside, a year-long flag on monthly chart. This break up is coincidental with gold's breakup of an eight month long flag from the first week of December '02 to second week of July '03 on weekly chart.
Summer of 2003 was the time when the public (globally?!) actively participated in the central bankers' liquidity flooding game. From April 5th 2005 issue of Business Week, Rich Miller reported in "The Fed Maybe Talking Too Freely:"
"Faced with the threat of a deflationary downturn in the summer of 2003, Federal Reserve Chairman Alan Greenspan and his central bank colleagues embarked on an unorthodox monetary strategy. For the first time ever, they provided investors with specific guidance on future monetary policy, saying interest rates would stay low for a 'considerable period.'" [emphasis added]
Are we about to witness another public, widespread recognition of central bankers' new policy stance? Are going to see the flood fate of public participation again?
The Mainstream Herd
With regard to the last question of public participation above, a source that I use regularly to gauge mainstream thinking is Standard & Poor's The Outlook. In the most recent issue, v. 77 no. 13 April 6, on page eight, the first question in the Q&A session is: "The price of gold has been climbing. What's your take on this investment?"
It seems to me that more members of the public are catching on to the gold train.
The S&P's answer begins with: "We think the long-range prospects are good."
That first sentence of about two or three paragraphs says it all. You can see how the herd is coming to (about to rush into) gold...
Silver Flags Everywhere!
I must report that the approximately 12-month long silver flags, from the end of last march to now, can be observed in all the following currencies (courtesy of StockCharts.com) with weekly charts: (1) Euro price of silver, (2) Swiss Franc price of silver, (3) Yen price of silver, (4) British Pound price of silver, (5) Australian Dollar price of silver, (6) Rand price of silver, (7) Canadian Dollar price of silver, and (8) last but not least gold price of silver.
Patterns weren't as clean (by a far stretch!) for silver in the last 12-month long flag from mid-'02 to mid-'03. You can observe the past flags in the same links above for the respective currencies.
The coming week(s) will prove to be interesting. In summary:
If silver price goes into breakup or zigzags, it will likely be a global phenomenon. Same price behavior repeated across many currencies and in gold-terms.
Monetary policy stance appears to be either at a turning point, and/or becoming well recognized and acted upon by the public from the whole world.
Gold and silver's coincidental closeness to resolving their respective flag suggests that the markets are telling us something big is about to happen. Several guesses include: the mortgage bubble bursts, the real estate bubble bursts, and the banks/financial institutions/hedge funds' derivative dilemma, or all of the above caused by Fed's open admission of behind the curve and inability in fighting inflation. The problem(s) that the markets are trying to foretell is/are of monetary nature and/or may involve acute financial market action, due to both precious metals' intrinsic monetary characteristics.
If silver experienced a sudden and sharp decline, it's a decline that should not be sold into. Ditto for gold. In fact, the decline may turn out to be a buying opportunity, of course, depending on an investor's personal budget and risk tolerance. If sold, there won't be time to get back in... Remember the Standard & Poor's mainstream advise to the public herd?
My guess: all these flags are trying to tell us (1) the herd (2) driven by something monetary (3) across the world (4) push up the price of gold rapidly (5) which pulls up the price of silver rapidly with it, or vice versa with silver pulling up gold.
Hold on to your physical silver and physical gold!
P.S. I am indebted to Larry Cole for bringing to my attention about a mistake that I made in "Of Oil and Silver." In the second paragraph of Conclusion section, I'd stated: "The highest oil-to-silver ratio occurred around 1974-76...maximum oil-to-silver ratio of 3.75 (=$15/$4), the peak of this ratio during the 'Seventies. As of last Friday, April the First, West Texas Intermediate Crude closed at $57.27 while silver on COMEX closed at $7.00. This works out to an oil-to-silver ratio of 8.18!" The correct data are that peak 'Seventies oil/silver ratio occurred at 1976-78, not 1974-76, peaking at about 3.10. Though the basic logic of currently relatively cheap silver to oil remains sound, I apologize my mistake of stating the wrong time span.