The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 11th, 2014.
The premise behind the movie (and book) Silver Linings Playbook is certainly a noble one, but not as profound as that of silver itself, which will have quite a playbook of its own in the not too distant future. In the story, the heroes, Pat and Tiffany, overcome adversity by maintaining a positive attitude in attempting to see a 'silver lining' in their uncertain circumstances, ironically, much like silver investors today. And in the end the two lovers find themselves in a 'happy ending', which in the full measure of time, will undoubtedly be the fate for silver (and gold) bulls as well.
Because as you will see below, there's a great deal of 'misplaced inflation' sitting in the stock market just waiting to find a home in silver. Why would this happen? And why silver? At some point in the not too distant future, American's are going to discover that unlike their favorite movie, or any other dream in which they may exist, there is no silver lining for both the economy and the stock market, as their stories are false and flawed, and they will be looking for a new home for their savings, where silver will 'fit this bill' for many.
Why silver? Two reasons: First, it's affordable for the public, still in the $20 area. As the price of gold continues higher with sovereigns and institutions finally panicking (once knocked out of their own denial), silver, the poor man's gold, will become the 'safe haven' of choice for the common man. And second, people are greedy, especially today, which is largely why they remain in overvalued stocks, and is why increasing numbers will eventually switch to both gold (for those who can afford it) and silver as they see the money made.
That's silver's playbook - so try to wrap your head around the storyline before it's too late. If you can do this, and get over your fear (and ignorance) of investing in silver, you may be one of the relatively few (because even when silver runs the public participation rates will likely remain low [ex. 5%]) who achieve 'financial salvation' - a happy ending in your own playbook. Seeing the silver lining in silver's still low price and positive fundamentals is the key to finding this happy ending for you, where like Pat and Tiffany, brave true-hearts prevail.
In circling back up to explain further the term 'misplaced inflation', we discover the reasons why increasing numbers will eventually see both the financial and moral imperatives associated with owning silver bullion, and for the gamblers, silver stocks. For most, physical silver bullion is the way to go given systemic risks today, and possible vulgarities associated with these growing risks (think market suspension / closure, bifurcation between physical and paper markets, ease of bureaucratic confiscation of electronic assets, etc.), not that bullion will protect you under Armageddon like conditions the mismanagement of our economy(s) could bring. You will need a gun for this.
But again, as far as the markets are concerned, based on the ever-important and fundamental observation the Dow / Gold Ratio (DGR) has turned lower once again, marked by the technical failure pointed out a few weeks back now in our commentary entitled 'Signal Failure', conditions are ripe for change, a change most market participants will not welcome. What's more, and in spite of the possibility the 'power's-that-be' maybe able to pull off a year 2000 look alike in terms of sequencing here, where tech stocks go bonkers into March, it's important to understand that the tide has turned for stocks (in spite of a technical correction higher in the DGR currently underway, as seen below), and their ultimate antithesis (in terms of measuring confidence in 'the system'), precious metals, where general market psychology should now swing back from a state of extreme moral hazard to one of fear - and loathing. (Figure 1)
Process could be slow in this regard however, so one should have patience. And again, like the year 2000, where the Dow topped in January, but tech stocks need to blast-off into March before the larger mania was fully exhausted, even if this occurs, as unlikely as this might be from a true sentiment perspective (both open interest put / call ratios and short interest, updated here and here respectively, do not support such a move) it's important to realize that with the exception of a relatively small number of highly speculative issues, orthodox highs for stocks are in place now. So even though the Nasdaq might be able to vex new highs for the move in coming days due to sheer liquidity in a fully mature mania, again, don't be fooled by this, as the transition of money flows from stocks back to precious metals has already begun, which will be more fully reflected in prices once diminishing numbers of stock market 'die-hards' are fully exhausted. (See Figure 2)
And again, as alluded to in our opening, much of the latent and misplaced inflation that has been poured into stocks over the past five-years will be looking for a new home as increasing numbers come to realize this, which will do wonderful things for the bullish case of the Silver / S&P 500 (SPX) Ratio, pictured above. Moreover, and in looking at the updated open interest put / call ratios and short interest above, one can see that from a sentiment related perspective, which is apparently all that matter these days with high frequency trading (HFT) and status quo sympathetic algos still in firm control of the tape, the tide will necessarily need to turn here eventually no matter how much skullduggery is applied to the formula. With overseas cash only markets likely to have an increasing effect on price discovery soon, one should look for a break higher in the sector, led by silver. (See Figure 3)
The key number for silver to get back through at the moment is $23, which is the 62.8% retracement from $50 denoted on the long-term weekly plot below. Once firmly back into the Fibonacci grid, market observers should watch for two important potential developments. First, a fall back through $23, and then the large round number at $20, would signal a potential waterfall decline in price, which is of course what the Western banking cartel would love to see. They are attempting to engineer this via their faulty and fraudulent Anglo / American paper pricing mechanisms that are still referred to as markets (think COMEX, ETF's, etc.), but so far have failed in this regard. And the second important thing to watch for is a lasting break above key Fibonacci resonance related resistance at $33. Once this is history, then it's a forgone conclusion $50 will offer limited resistance as silver blasts off through $100 into triple digit territory. (See Figure 4)
And silver has been outperforming lately, giving us a clue a bullish impulse might be just around the corner. Both the open interest put / call ratio and short position on SLV support such a move, along with the short position on AGQ, seen in the attached above. Unfortunately however, the ratios and short interest(s) for gold and the shares are not as constructive, giving back much of recent gains, with the exception of NUGT, which is a much smaller contract than GDX, that appears to be holding up the entire sector at the moment. Your guess is as good as mine just how long this can last, however it's safe to say the shares are already getting a little ahead of themselves, so new buying here would be dangerous.
What's more, this cautious sentiment should also be applied to the juniors right now as well, with the open interest put / call ratio for GDXJ also back below unity, and heading lower apparently as greedy speculators become all lathered up once again. Therein, you could see the recklessness in the trade yesterday as unsuspecting speculators were bidding up shares while the bureaucracy's price managers were stepping on silver all day in Chicago. How all this resolves by options expiry next Friday is of course unknown, as silver paper markets are set up for a rally; but again, the shares are already extended based on present circumstances in the paper gambling parlors, so be careful. Buying bullion for long-term wealth preservation (or speculating in gold and / or silver futures or ETF's) definitely appear better buys than the shares at the moment.
In order for any such concerns to be removed, both the open interest put / call ratio and short interest for GDX would need to rise considerably, more than doubling for the former back above unity (1), before one could count on a broad squeeze in the sector developing, as has been the case with the broad stock markets. And while in relative terms this is now a thing of the past for stocks, with for example the open interest put / call ratio for the QQQ now below 1 (making present outperformance into options expiry unlikely), one does need wonder just what lengths the bureaucracy's price managers will go to keep stocks supported considering the degree the economy is now financialized. But again, in spite of any such efforts, it's important to realize stocks are ready to roll over, the Dow / Gold Ratio is essentially 'crashing, and just about nobody sees things clearly at the moment.
Therein, like B of AML in the attached, just about nobody sees the SPX falling through 1700 when / if it gets there, where it will be instructive at such a juncture to watch speculator betting practices (think in options and shorting) to see if bearishness has returned in the trade, or speculators are in fact 'buying the dip' schooled by reckless fluffers. Because if 1700 fails, this is when you can expect precious metals to really take off, which again, is not in most speculators playbooks, but would obviously be a dream come true for that of silver investors. As again, although silver is low right now, which is its' silver lining, it should lead the sector as the Gold / Silver Ratio heads back down to historically significant values, values that reflect how silver actually occurs in nature relative to gold, bottoming somewhere between 10 to 15. This of course means silver, which again is 'poor man's gold' (because it's much lower in price than gold), will likely outperform gold by a factor of five running into a mania peak in and around 2021 (Fibonacci 21-years from the bottom in 2000).
So, let silver add a silver lining to your portfolio too. And the magic of the situation is it's so cheap at $20 right now, one need not employ risky strategies to make outsized profits eventually, where just buying the bullion will likely prove the most intelligent strategy in the end, buy existing increasingly fragile (faulty and fraudulent) Western paper pricing mechanisms (they are not markets).
Make silver bullion is the silver lining of your portfolio.