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posted on 28 January 2018

Why We Could See $250 Silver Before It's All Said And Done

by Peter Krauth, Money Morning

Article of the Week from Money Morning

Last week, I showed you several charts that prove a powerful gold bull market is back.

Today, I'm here to show you that it's got good company.

You see, silver and gold usually travel in a pair. So the silver bull is also back.

silver.bar


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And given silver's volatility and leverage to gold, I think every investor should be positioned in this precious metal right now.

As you'll see from the charts I'm going to show you in a moment, silver is going to head dramatically higher.

The unprepared risk being left behind…

Three Things Tell Me Silver Will Surge

Although silver prices are currently around $17, I think we could see them reach as high as $22 later this year and eventually peak somewhere around (no kidding) $250 per ounce.

How can I suggest such a lofty price? Well, based on my forecast for gold to peak at $5,000 and an eventual gold/silver ratio to reach a low of 20, I get a resulting silver price of $250.

But that's still some ways off.

Now, let's explore the indicators that are telling me the silver bull is back, and what we need to keep an eye out for as this bull progresses.

The first indicator I want to explore with you is the wedge being formed by the silver price, accompanied by higher lows and rising volume.

silver continuous contract

As you can see from this chart, the silver price bottomed in late 2015 and has been rising on balance since then.

Despite being off its 2016 high, near $20.50, the silver price has been establishing higher lows. The first of these was in July 2017, then again in December of the same year.

With silver's price trading in a gradually narrowing range as we move forward, it will eventually have to break out of that "compression."

Given that we see silver futures are being traded with increasing volume and the overall trend is higher, in my view the break out is overwhelmingly likely to be to the upside.

We've got lots of confirmation. Next up, let's look at the recent Commitment of Traders (COT) report for silver futures.

Silver Has Moved Past "Maximum Disdain"

COT reports can be a great tool to gauge sentiment in the market. Futures traders will, naturally, buy or sell contracts based on their expectation of a higher or lower future silver price.

At the end of 2017, futures traders reached an extreme level. This past December, they had become their most bearish since 2014, and before that, since 2003.

This information is useful, because such extremes have historically marked turning points.

Once silver sentiment becomes so extremely bearish, odds are its price has hit a bottom of sorts. Look at it like this: Silver becomes so hated, there's no one left to sell, and so buyers start coming into the market.

Drilling deeper, it's also worth looking specifically at the position held by commercial hedgers.

These are widely considered to be "smart money," as they're involved in daily operations and movements for specific commodities. Typically commercial hedgers include miners that produce silver as their main product or even as a byproduct.

According to Sentimentrader.com, commercial hedgers decided in late December that silver had likely bottomed, as they held their lowest level of short contracts since mid-2015, then began hedging once again.

silver hedgers position

Before then, the next lowest level was late in 2015, when silver finally bottomed and shot higher, from $14 to $20.

Silver Stocks Point to Much Higher Prices Ahead

My next indicator looks at the relationship between the price of silver stocks and the price of silver itself.

As a proxy for silver stocks, I use the Global X Silver Miners ETF (NYSE Arca: SIL).

By looking at the ratio between the SIL ETF and the silver price, we can gauge whether silver stocks are relatively cheap or expensive compared to silver.

If the ratio is falling, silver stocks are getting cheaper relative to silver; if it's rising, then silver stocks are gaining in price faster than the silver itself.

This relationship reached what appears to be a multi-year low back in early 2016, when the ratio hit a low of 1.1. At that point, silver stocks exploded higher, with the ratio peaking at 2.6.

It has since fallen back and trended lower until what appears to be a recent higher low in mid-November.

global x silver

Silver stocks bottomed just weeks later, in early December, with SIL gaining 13.8% since then.

The SIL/silver ratio appears to have bottomed at 1.8 and has been heading higher, meaning silver stocks are rising faster than the price of silver itself once again.

What's more, you can see the Relative Strength Index and moving average convergence divergence momentum indicator are confirming this new uptrend.

This recent change in direction says silver stocks are in a new rally. Often silver stocks will lead the metal higher.

This kind of outperformance by silver equities suggests the silver segment is in a bull market, and it's likely a bullish signal that silver has embarked a new, extended run higher of its own.

The silver bull is back. Now's your time to take a position.

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