Published on October 06 2014

Instead of Puking, Do This

The sure sign of a market in capitulation is when those who are long feel like puking.

With gold and silver prices in what certainly feels like capitulation mode, pat yourself on the back if you didn’t succumb to the pressure and sell.

Actually, pat your future self on the back, because it’s that person who will realize the benefits of your discipline today.

In the short-term, though, the bad news is that the decline is probably not over. Gold’s low of $1,180 is likely to be tested and possibly breached. Silver’s previous low was broken weeks ago.

It all seems like a huge disconnect to the realities we can all see with our own eyes. As just one example, the mainstream applauded the lower unemployment number last Friday—but the labor participation rate fell to a 36-year low, with a record 92.6 million Americans no longer in the workforce. And the stock market soared on the news.

I don’t think I’m just being stubborn because I’m sure that, at some point, disconnects in data like that will matter. We’re living in a central bank-controlled world more than ever before, but the odds of central planners steering us out of the corner they’ve painted us all into are remote. The math just doesn’t work, and history has demonstrated the outcome of such fiscal, monetary, and economic foolishness numerous times.

The Biggest Disconnect

While all precious metals have dropped, the silver price has suffered the most.

As a monetary metal, it seems to defy logic that silver has plummeted while debt levels have soared, money printing is at historic levels, and fiscal deficits remain stubbornly high in spite of record federal tax revenue.

But the disconnect is bigger than just the price vs. silver’s monetary role. Consider the following aspects of the silver market that are rising:

  • Global electronics demand;
  • Global jewelry demand, especially in Asian countries;
  • Total industrial demand (now expected to grow 5% per year through 2016 and outpace global GDP growth);
  • The number of new industrial applications;
  • The number of new biomedical uses;
  • Photovoltaic (solar) demand;
  • Volume on the Shanghai Futures Exchange (which already surpassed the Comex last year);
  • US Mint sales YTD: silver Eagle sales in September were double July and August; it sold 766,000 Eagles on the last day of the month alone;
  • Perth Mint sales: they were 41.6% higher in August than July, and September sales were the third highest of the year;
  • The likelihood of a supply deficit this year (based on CPM Group estimates);
  • Domestic demand in China, which is expected for the first time in history to exceed 250 million ounces this year;
  • Gold/silver ratio (closing in on a five-year high);
  • SLV ETF holdings (and now a gnat’s eyelash away from 2011 record highs); and
  • The difference between price and the cost of production.

The following aspects of the silver market are falling:

  • Price
  • Sentiment

It’s honestly hard to find a more distorted market anywhere else in the world today. At some point, this disconnect must be rectified.

But the disconnect is worse than that…

  • The RSI (Relative Strength Index), a measure of how overbought and oversold a security is, just reached its lowest reading ever on SLV. The index hit 11.68 on September 30, the lowest level since the fund’s inception, including the selloff in 2008. In fact, the index never fell below 15 until September 22, 2014.

In other words, SLV has never been this oversold.

This doesn’t mean the silver price can’t fall further, nor that if it bounces from such oversold levels it will be sustainable. But it does mean the rubber band is more stretched than at any other time we know of.

The disconnect is worse still. We all know that silver is more volatile than gold, so it’s not surprising that it has sold off more than gold in this recent downdraft. But…

  • During the waterfall decline in 2008, silver fell 27.1% more than gold (as measured from its high that year to its low). However, so far in 2014, silver has fallen 40.6% more than gold.

Last, silver is closing in on its longest bear market in modern history…

This updated snapshot shows six decades of bear markets. The black line represents silver’s decline from April 2011 through October 3, 2014.

The disconnect between the silver price and its fundamentals is greater than ever.

Instead of Puking, Here’s What I’m Doing About It…

First, I can’t let this grossly overdone decline go by without taking advantage of it. I contacted one of our recommended bullion dealers and asked them if they could give us a discount on premiums. They can, and so I will be offering BIG GOLD subscribers two discounts on bullion in tomorrow’s issue: one on silver and one on gold, both with discounted premiums you can’t get elsewhere. Combine the low premiums with the recent selloff and this is a remarkable opportunity to add more ounces to our portfolio for the same dollar amount than we’ve been able to do in four years.

That’s exactly how a contrarian should look at it—and in this market, you’re a contrarian or a victim.

Second, because many related stocks have fallen off the proverbial cliff, some are now at a point where a double or triple is not unreasonable to expect once the market turns around. The selloff in one of our gold stocks, however, is so over overdone that our analysis shows it could be a five-bagger from current prices. I plan to buy this stock after waiting two days for subscribers to do so first, but to capture that return you must buy it now, before any bounce can occur.

Third, my introduction tomorrow will show why owning gold right now is more critical than ever. I ask 14 questions that shed light on the multitude of risks we’re exposed to right now—and then ask five pointed questions to determine if you are using gold and gold stocks in the most optimal way for the current environment. The perspective you’ll gain from this view could make you think more constructively about your gold investments, or in the least, reinforce your outlook. It has for me.

That’s what I’m doing. As our profitable “gold insurance” recommendations that have profited from falling gold prices show, this is not just stubborn gold bug talk, or pride—or even stupidity. It’s that I don’t believe in free lunches and I do believe that sooner or later the economic realities we all see will impact our market strongly and positively. If you want to join me and others at Casey Research and capitalize on what we think will be a fleeting opportunity, start here before Tuesday’s issue is released. You can get started by reading the September issue; it comes with a list of catalysts that could spark a turnaround in this market, well worth 10 minutes of your time.

I hope you’ll join us, but either way, don’t give up the ghost… or the food in your stomach.