Tuesday August 27, 2013 11:55
I have previously written about how gold can be used as a leading indicator for silver. Using this principle, there is an indication that we are at or close to the period for a 1979/1980 style rally in silver. The following is a simple concept but can make for some intense reading (a lot of concentration and possibly re-reading is required). Below is gold chart from 1968 to 1975:
I have highlighted a cup formation that formed from 1969 to the end of 1971. It took about 33 months to form the cup. If one counts 33 months (the time the cup took to form) after price went higher than the peak of the cup, then one gets to the point where the final rally to the peak started.
Also, the peak came in 36 months after passing the peak of the cup.
The silver chart also formed a cup around the same time of the gold chart; however, silver’s cup was bigger. Below, is a silver chart from 1968 to 1980:
On the chart, I have highlighted the cup that formed during the same time as the gold cup. The cup formed from 1968 to the beginning of 1973 – about 60 months. Now, suppose that it was 1978 and more than 60 months have passed since the silver price went higher than the cup’s high. If one was now (1978) to use the outcome of the gold price action after its cup formation to predict what silver could do after its cup formation, one would come to the following conclusion:
The silver peak could be a minimum of 17.03 times that of the depth of the silver cup plus the high of the silver cup. That would be 1.277 (2.565 (high of silver cup) less 1.288 (bottom of the silver cup) times 17.03 plus 2.565 = 24.31. The peak was not at $24.31 but at $50 – 37.145 times the depth of the cup plus the peak of the cup.
Using this methodology and putting it all together, it would have been reasonable to expect:
The price did hit a peak in November 1978, but it was not an all-time high or anything close to the peak estimated in point 3 above. A strict application of this methodology would have meant one would have held on to December 1979 when the price went to the target of $24.31. That would have been a good return from the $5 to $5.5 price levels of 1978.
Now, that is easier done in hindsight, since the reality is a very different story. Despite missing out on silver doubling (at least) from $24, I would be happy with such an outcome. Roughly that would be like silver going to $400 from where it is now, but one only catching the move to $200. I would take that anytime it was offered, now.
From the above, you can see that it is possible to use gold’s price action to predict what the silver price could do and when. Let us now apply the above methodology to the current silver and gold situation. Below is a monthly gold chart from 2008 to 2013:
Just like for the 1970s, I have highlighted a formation (this time more of a triangle instead of a cup) that formed from the beginning of 2008 to the end of 2009. It took about 20 months to form the triangle. If one counts 20 months (the time the triangle took to form) after price went higher than the peak of the triangle, then one gets to the point where the final rally to the peak started (end of June/beginning of July 2011) – just like it was for the 70s chart.
Also, the peak came in around 22 months after price went higher than the triangle. That is relatively the same as the peak for the 70s chart. The peak for the 70s gold chart came in about 36 months after passing the peak of the cup; however, the formation is currently smaller than the 70s formation – a ratio of 20:33. So if applied to the 36 months of the 70s, we would get 21.82 (20/33 *36), which is rather close.
The silver chart also formed a triangle around the same time of the gold chart; however, silver’s triangle was bigger. Below, is a silver chart from 2006 to 2013:
On the chart, I have highlighted the triangle that formed during the same time as the silver cup. The triangle formed from 2008 to before the end of 2010 – about 31 months. Using the same methodology as we did for the 70s situation we can try and predict what the silver price might do. Unfortunately, this methodology cannot help us to determine where the bottom for this silver decline might be (but more about that later).
Using this methodology and putting it all together, it would be reasonable to expect:
The reason I am presenting the above is not for the purpose of calculating a target for silver, but to have an idea of where silver is going over the next months as well as have a feel for the timing involved. The price targets are just a guide to help navigate the timing calculations. I will go into more detail about price targets in another silver and gold update.
Note that the above is an extract form my premium silver update.
By Hubert Moolman