Again, I am quoting a Warner Brothers cartoon, this time Daffy Duck. In a Western Cartoon, Daffy is after Nasty Canasta riding on his horse called Tinfoil. This a spoof of the Lone Rangers horse "Silver". The editorial portion of this article focuses on silver and whether or not it will ever enter the bull phase and be taken seriously rather than as a parody similar to Daffy and his horse Tinfoil. The inter-market analysis section is primarily Elliott Wave analysis of the XOI, HUI, USD index and XOI with two accompanying charts for each.
Tinfoil or Silver???
The above ground silver supply since the early 1980's has depleted the near 1.3 billion ounces of inventory. Silver has been a form of currency used for several millenia. It is also an important metal for industrial applications. Silver was discovered shortly after copper and gold in early civilization. Silver has always been referred to as "poor mans gold" and has been used in currencies of lower valued coinage. Manipulation of currencies is not akin to our current modern day governments. Silver coins is the history of England were manipulated by reducing the silver content, reduction in the weight of the coins, or both . As an example, a silver penny in 1527 was one part silver to two of copper by 1546 which quickly devalued. Silver coins from the 15th century onward used for larger denominations were maintained as the purity of sterling (92.5%) until 1920. At this point, the silver content was lowered to 50%. In 1947, the silver content removed completely, being replaced by a copper (75%) - nickel (25%) alloy. This tracks out how today's money has been stripped of all ties to precious metals (as the US went off the gold standard in 1971).
Aside from silver as a currency whose weights were derived from comparisons to grains of crops along time ago, the metal has found significant application in industrial processes. The main silver mineral is the argentite (Ag2S), which usually occurs associated to other sulfides as copper or lead sulfide. Other silver minerals are cerargirite (AgCl), proustite (3Ag2S.Ag2S3), pirargirite (3Ag2S.Sb2S3), stefanite (5Ag2S.Sb2S3) and native silver. The silver occurs in most of the lead and copper ores, and associated to cobalt and gold arsenide. Most of the produced silver is a by-product of the extraction process of these metals. However there are some mines specially devoted to the extraction of this element. The largest world producers of silver are the USA, Canada, Mexico, Bolivia, former-USSR, Australia and Germany.
Silver has three main areas of consumption accounting for 95% of its use: industrial and decorative uses, photography and jewelry, and silverware. The industrial uses of silver are far too vast to discuss in an article, but new uses include silver-based fibers for bandages, and a safer wood preservative than the current arsenic based treatments. A very small amount of silver is used in each product that may enter the market, but its low price makes it unfeasible to extract. Most silver has been lost in the industrial processes, unlike gold. If 5% or less of silver is being used for investment purposes, why would one anticipate a run in silver prices if it is recovered from most other mines as a byproduct?? The demand for silver is increasing while stockpiles of the metal are being depleted. The amount of silver recovered as a byproduct is not going to fill the gap of demand in the future. With the average cost of $6/ounce to mine silver profitably around the globe, it is understandable that mines are shut down with a low price of sub $5/ounce.
Why would one want to have silver so cheap? Industrial companies that have cheap silver can make more money, bottom line. Although gold and silver have both been in bear markets, there is sufficient evidence of governments trying to control the price of gold (POG) and the price of silver (POS). If currencies are linked to gold or silver standards, the only way to inflate ones currency is to expand the gold and silver reserves. This can only occur gradually, as there is only so much that can be recovered each year. It is not surprising that countries that did have their currencies linked to either metal enjoyed relatively stable inflation rates for several generations. The US government with its strong dollar policy wished to expand their currency with forest rather than metal and is about to go down in flames. Two times in the United States history governments have gone off the gold standard and both times the paper currencies ended up worthless. In order to play the game, the US had large reserves of silver it could feed the market slowly and suppress the POS and POG. Further complex financial instruments were derived like derivatives, option plays, futures etc using paper have been the main suppresser of the silver price. As long as there is silver and gold to be supplied to the market, the paper games can continue. When longer term wave patterns have a trend change, it is difficult to stop the wave......especially if it is a sunami. The US government must have known this game would create a sunami wave, but when it is 1000 miles away, who cares. It is only when the wave is lapping on ones doorstep does concern arise. With silver supplies drying up in the next 12-18 months, it will be impossible for traders to suppress the POS simply because the actual shortage is there. There is currently 72x the amount of silver mined each year traded on the COMEX yearly. This spells a financial disaster waiting to happen when people actually want to start taking delivery. Silver certificates could be in jeopardy should such an event unfold. Commodities can be controlled by paper as long as the supply remains steady. When demand exceeds supply, the tables turn. Why silver and not gold as a possible trigger for PM's to advance. The POG/silver ratio is currently at 73:1. Normally this ratio exists at around 16:1. The distortion in the ratio shows that something has to give. Precious metals are always a way to preserve capital in hard economic times, but if the paper game could continue (assuming years more of silver and gold supply above ground) it would. The fact that things are starting to shift to preference of PM's can be attributed to weak markets, but there is more. To balance this ratio, silver would have to be trading 5x higher than current levels with gold unchanged to have a reversion to the mean of 16:1. This is very bullish for the POS and silver stocks longer term.
The next section is an inter-market analysis of the XOI (oil index), S&P 500, HUI (gold BUGS index), and the US dollar index. The interrelations of the wave patterns help clarify the direction of each indice. Examining one index by itself is similar to three blind men feeling and elephant and asked to describe it. Each will describe what they detect. Each is correct, but not a sum of all parts. Far more extensive analysis will provide an even more accurate market picture.....however that is all I am covering in this article.
Inter-market Analysis
Elliott Wave theory has been validated by statistical analysis of millions of data sets. It represents a marriage of most market analysis techniques rolled into one i.e. pattern recognition, trend-lines, Fibonacci etc. The beauty of Elliott is that quantification of the degree of a correction or impulsive advance may be determined. For anyone wishing to seriously learn Elliott Wave I would strongly suggest reading "Mastering Elliott Wave" by Glenn Neely. All sections have two charts showing the longer term and shorter term wave patterns. Text accompanies each chart to describe in detail the pattern and anticipated market directions.
US Dollar Index
The first chart shows the longer term pattern for the US dollar index. The pattern has been forming an impulsive leg down since April of 2002. The current wave according to the chart is wave (3) of [3]. If this wave is extended 161.8% of wave [1] then it would bottom at 82 cents. This is thought to occur by the end of this year or early next.
The second chart shows the shorter term pattern. Notice the rapid descent of the dollar so far. It seems that no government intervention is taking place, which translates into the wishing for a weaker USD to try and generate some inflation at home from imported goods so risks of deflation are averted. Being long on the US dollar will be more costly than the current drop.
HUI Index
The first chart illustrates the longer term wave pattern for the HUI. A large ascending triangle appears to be developing since the June peak of 2002. The labeling at the primary or intermediate degree is somewhat uncertain. When intervention in markets occur, corrective wave structures will develop. While the trend-line shows we are in a bull market, the wave pattern technically speaking could still be in a bear market, with a higher move, and slight correction to complete that pattern. The bull market may yet be ahead technically according to the wave pattern , while trend-line analysis confirms we are. The future move of the wave structure will clarify the labeling at this higher degree.
The second chart illustrates the shorter term pattern for the HUI. The wave structure of wave D (what we are in currently) is a purely corrective wave, which fits with the larger degree structure. The pattern should move up to 155 prior to a turnaround to 130-135. This should spell the end of wave (4) or [X], pending how the pattern develops.
XOI Index
A larger data set was obtained recently for labeling this chart, and some minor changes were made at the upper degree level. The question marks refer to the uncertainty of how the pattern will develop based upon the shorter term chart pattern shown below. Since the current corrective wave either wave [4] or II (pending the count at these degrees (cycle and primary) has been progressing since 1998, there is a high probability that the next wave will be the extended wave of the pattern. I would expect nothing less than 800 for this index 3-5 years from now
The second chart illustrates the shorter term wave pattern for the XOI. Due to a shift in the pattern development, a slight change was made near the end of the chart with arrangement of the degrees of the wave structure. 470 is a technical buy, while beneath is uncertain as to how the pattern develops.
S&P 500 Index
The first chart shows the longer term wave pattern for the S&P. The longer term downtrend line has been violated. However, there is a mountain of evidence to suggest the markets will keel over significantly in the next 1-2 weeks. A descending type of non-limiting triangle structure has been developing since July 24, 2002. The current wave must not break 951 for the preferred count to hold ground. A break of 951 and the alternate count shown with the grey scale circled comes into effect.
The second chart shows the shorter term wave pattern for the S&P. This has been a long standing count with very minor changes made to the arrangement of the wave structure. The pattern is nearing completion in the next one to two weeks based upon the wave structure. A move down will complete wave Y.(E).[X].y.[w] (see longer term chart for the labeling scheme). There is an expected technical bounce after this decline that should last one year minimum. It will be thought of being a new bull market, but it merely will be a bear market rally of one larger degree. After wave [x] completes, expect the market to head to new lows
DOW
This chart is not an Elliot chart, rather a DOW end of day chart with 50 and 200 day moving averages, with a stochastic oscillator set to 55,5,13. The green lines mark the market top at the oscillator crossover at its higher value., and the red lines market the market bottom near the oscillator crossover at its lower value. There seems to be a perfect correlation. The current wave pattern has the stochastics nearly set to cross over.......an omen the pattern is nearly complete.
Summary
This editorial has suggested that silver shortages may spark the significant advance in precious metals as a group due to a looming supply shortage. This represents an opportune time to scout for undervalued silver stocks that may increase exponentially in value. Inter-market analysis shows a weakness in the USD relative to HUI. The HUI and XOI patterns (both commodity based) have incredibly bullish wave patterns over the next 10-15 years (short term uncertainty regarding how the structures develop). The S&P, DOW etc. have a divergence with the USD index. The fight between longs and shorts is suspending the markets up temporarily. Equities have a downward trend-line compared to commodities. Crashing stock markets with higher commodities is a different scenario than some Elliotticians are predicting. One must be willing to change their count and opinion on a dime to play the markets properly.
