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Silver’s Time to Shine

14 December 2018

After a sharp rally Friday night, gold continued to edge higher this week before encountering some resistance at the USD$1,250 level.  Overall, short-term trend appears positive and we are currently trading around USD$1,245 for gold per ounce and silver USD$14.72, higher than this time last week.
In local currency terms, the AUD/USD is slightly lower at 0.722, with gold trading at AUD$1,728 and silver at $20.65.
Interesting enough is the ratio of platinum to palladium. Palladium is experiencing short supply and a FOMO rally has pushed prices higher than gold per ounce in recent times. A bit bubbly perhaps, and could be at risk of a correction, but may be a signal of what’s to come across the rest of the precious metals space in the future, if we continue to see physical demand increasing into 2019.
Platinum daily chart below is interesting for those contrarians looking for market bottoms, as we see the price bouncing off USD$780 once again, which is close to ten year lows for the metal. Contrary to gold, there isn’t yet anything to confirm the overall downtrend is over, but certainly one to watch moving forward.
Platinum chart
Silver was the better performer than gold this week, staging a 2% rally. Price action is shaping up nicely and indicating that there is a very decent chance that silver could have found a bottom here at USD$14.00 and is set to recover higher from incredibly depressed levels, and overly bearish positioning.
It was starting to look a bit shaky with silver recently battling to stay above the crucial support area of USD$14 per ounce, but so far a very positive development that this level was met with strong buying and prices have since recovered. No doubt, if silver broke south of this multi-year support level, level things could have gotten ugly short term.
Silver price chart
It would seem a lot of traders may have thought this level would break to the downside, as Commitment of Traders’ speculative positioning has been net short for the past few months, although easing back to neutral more recently. We have mentioned in recent market updates that the extremely pessimistic positioning of speculative traders on both gold and silver was an indication of prices potentially bottoming. We have since seen gold rally nicely with silver coming late to the party, as per usual.
There is opportunity for somewhat of a short squeeze in silver if prices break north of USD$15, as shorts may start covering their positions to minimise any losses above this level. So if $15 breaks, it could be a quick trip to USD$16 per ounce where the recent downtrend line could provide some resistance.
As seen on the chart below, net positioning in late 2018 is an anomaly of this decade and indicative of environments that create market bottoms and not market tops. Net positions are literally as negative as it gets, so this can provide a good indication that things are more likely to improve from here. 

CFTC Silver Speculative Net Positions

CFTC Silver Speculative Net Positions

Almost all of our readers would be well aware of the Gold Silver Ratio (GSR) which has marched even higher in 2018 to 85.6:1 currently. Of course, it can always go higher, but from a historical perspective, silver remains very undervalued relative to gold, considering the average ratio of the last 30 years is around 50:1. Even a reasonable correction in the ratio could see much higher silver prices.

1 Year Gold/Silver chart

It certainly has been a long bear market in silver, lasting a few more years than gold, with many investors running out of patience in recent years. We at ABC Bullion however saw a big pick up in physical demand in the second half of 2018 versus the first half, so there are clearly a lot of contrarians that think prices remain too cheap and are due a rally back to reality.
Dutch Bank ABN Amro thinks that there are higher prices ahead, noting US Treasury Yields to actually start declining in 2019 and expect positions of speculative traders to return to normal levels from the net-short extremes we see currently. The chart below outlines their targets for all PMs moving forward, with silver seen to outperform all four metals and palladium come off a bit in coming years.
ABN AMRO Silver chart
Source: ABN AMRO
Silver will be one to watch closely in coming weeks, and could easily be the best performing precious metal in 2019 if we see a favourable year for gold. We do expect the Fed to fail at their goal of three rate increases in 2019, which should eventually lead to US dollar weakness, benefiting all precious metals, but silver seems most undervalued and oversold currently.

Yellen Now Warns of Another Financial Crisis

In the most amusing news of the week, former Federal Reserve chair Janet Yellen has warned she sees another financial crisis on the horizon, despite being on record a year ago claiming she believed the next financial crisis wouldn’t happen in our lifetimes. I’m not sure if her analysis is based on visions, or if she thought she would kick the bucket within 12 months, but at which point do you admit complete incompetence?
Earlier this week in a discussion moderated by New York Times columnist Paul Krugman, she warned of excessive corporate debt and “gigantic holes” in the system. A slight backtrack from her outlook a year ago, but I guess it is easier to speak your mind when you’re no longer the chair of the Federal Reserve.
This original call for no financial crisis in our lifetime will surely sit on the mantel piece with Bernake’s 2006 quotes on housing. Yellen’s concerns for the economy in her latest discussion would be nothing new to our readers, but it’s quite concerning that the intellectuals that head up central banks are happy to participate in the largest monetary experiments in history, without actually knowing how the overall economy will fare from one year to the next.
Mario Draghi also announced this week that he sees economic risks in the Euro zone worsening, despite putting an end to his bond-buying program this month. Who knows, in a few years we might see the RBA come out and admit they inadvertently created a housing bubble.
The theme of the post-GFC years has been “don’t fight the Fed” or rather don’t try to trade against Central Banks’ wall of liquidity and stimulus. So moving forward as CBs remove the stimulus and start to tighten, you may be fighting an uphill battle being long equities.
Tune in next week for a comprehensive summary of 2018.
Until then,
John Feeney

This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.