Silver Notes via Chart

I am going to try this one more time in the hope that it helps some of you silver guys out there to understand why the metal is moribund and is having trouble going north. I have been writing about the connection between Silver and the broader commodity complex for more years now than I care to remember and yet it seems as if I am sometimes spitting into the wind in attempting to help some of you understand what it is that moves the metal.

I do not view silver as a pure monetary metal in the same manner in which I view Gold. Yes, it is and has been in the past, a metal used as money. It will continue to do so in the future. But one does not read about Central Banks acquiring silver for their reserves as one does about Gold. When people are concerned about the health of a domestic currency, they generally resort first to the price of Gold in that currency, not silver. These are just simple facts and are in no way meant to disparage silver. It is simply the way things are. Traders/investors, if they are to be successful (and is this not what we all aspire to be?) must come to terms with how the broader world of investors see their particular holdings.

I will give you an example - suppose you find what you believe is a good stock at a good price and just know, I mean really know, that the stock is going to trade considerably higher in the future. So you take your hard earned money and invest it into that particular stock waiting for it to go higher, as you are just absolutely certain it is going to do. However, it just sits there and goes nowhere, day after day, week after week, generating more and more frustration and might I say, anger in your heart that other people can possibly be so stupid not to see what you see. Sound familiar?

The problem is, for any stock, or any commodity, to continue moving higher, more and more people must come around to seeing your choice in the same manner as you do. In other words, the CROWD must come around to your way of thinking. Now, you may mutter and grumble and cuss and swear because the stock is just sitting there and not moving higher, but no amount of that is going to change the opinion of others UNTIL.... get ready for this.... that OPINION changes. Wow, is that profound or what?

Seriously, what it takes for a stock or commodity to move higher is a change in sentiment towards it where a consensus forms among the crowd that the price is too cheap. When that occurs, and who can say with any certainty when opinions of others will change,  then the price will move higher as the perception of VALUE will then change.

I said all that to say this.... Silver is currently trading as more of an industrial metal in an environment in which the MAJORITY are convinced that inflation is non-existent. NOTE WELL - I did not say that I believe this. I am simply telling you what the CROWD believes right now, at this moment. This is also not to say that the CROWD is right. It is to say however that this is all that currently matters when it comes to the metal.

Take a look at the following chart I put together to help you understand this. Note that there are two lines; one in red which is the Continuous Commodity Index or CCI; the other in Black, which is Silver. Can you not clearly seen that these two lines exhibit a near perfect symmetry? I have pointed this out in the past but feel the need to do so again. What is this chart saying?

The answer to that is simple - Silver is tracking the rest of the broader commodity complex and that commodity complex is moving in a sideways to down pattern. Remember when I stated some time back that we more experienced traders used to buy silver when soybeans were going up? I know at that time some of you who read that were perplexed but quite honestly, it is a very simple connection. Rising soybean prices tended to move up alongside of corn and wheat meaning food input costs in general could be expected to rise. This fed into the INFLATIONARY EXPECTATIONS of higher food costs percolating through the broader economy. Yes, the connection was not perfect nor was it meant to be but it did indicate how silver thrived in an inflationary environment.

Now, can any of you out there looking at this chart honestly tell me that you expect silver to shoot sharply higher while the CCI is tracking lower?  I repeat - SILVER thrives in an inflationary environment. It will not perform in a deflationary environment. Now, for whatever reason, and frankly who cares, the hedge funds are pressing many of the individual commodity markets from the short side. The grains, some of the softs, and the base metals are notable examples of this.

 I mentioned copper and will continue to do so to illustrate that as a perfect example of the disconnect between Dr. Copper and the US equity markets. I have said that I believe that Dr. Copper is a better indicator of growth than the equity markets. The latter are being goosed higher by artificial stimulus, much like a drug addict is kept from experiencing withdrawal by having regular doses of the drug injected into his system.

Let me digress here a bit to answer a critic - I made the statement that I do not expect silver to move higher until we get some solid evidence that there is real growth in the US economy, the nature of which will drive stocks higher. The critic said that stocks were going higher while silver was going lower thereby invalidating that claim. What he misses however is the FACT that US economic growth is comatose; what is goosing stocks higher is $85 BILLION a month of QE that is ending up in the Wall Street casino. In other words, it is not solid growth driving stocks to record highs, it is artificial money that is doing that. That is not sustainable.

This is the reason that hedge funds are pounding Dr. Copper lower - their models are telling them that global economic growth is no where near it should be considering the huge sums of money that have been conjured into existence by the Central Banks of the West, including Japan. They are looking at the same thing some of us are looking at, namely, the VELOCITY of MONEY, which is going nowhere. That is what I mean to say when I say that the money being created by the Fed is fueling a bubble on Wall Street. The velocity of money tells me that it ends up not changing hands frequently as is needed to fuel inflation but is rather shoved one direction, into stocks and staying there. Certainly we are not seeing many of these companies, whose stock prices are daily soaring higher and higher embarking on a hiring binge now are we?

As a matter of opinion I believe we are seeing really chinks in the armor of the equity bulls even in spite of this mammoth liquidity injection being orchestrated by the Fed. Consider yesterdays abysmal payrolls number. That stunned observers. I have noted the breakdown in the Russell 2000 which is now below its 50 day moving average. The Dow Transports also are lagging, another sign of deterioration internally of the equity rally.

One way or the other we are going to see which indicator is right - Dr. Copper or the US equity markets. As long as the hedge funds are eager to short copper and pound it lower, I will have to go with that. When this speculative crowd changes their mind and their perception of things, then our task as traders is to recognize this shift and act accordingly. If we can do that, we will profit. If not, then we lose.

I will leave you with a chart of copper indicating the trend which currently is sideways to down. It is closing in on a support zone. If it were to break down through this zone for any reason, it would signal odds of a further slowdown in global economic growth. Given the size of the recent Bank of Japan "anti-deflation" package, along with the rest of the actions by the Western Central Banks, and the actions of the Chinese, it seems to me that the odds of this market breaking that level are not especially high however. If it bounces off of support, I would look for silver to hold support also. If not, silver is going lower.