There may be a lot of silver hype, but the bull case is now square with the macro backdrop
A slightly edited excerpt from the December 14th edition of Notes From the Rabbit Hole:
I added to my P position way up here in blue sky because of the bigger picture macro. Not because of the momentum so obviously in play (until Friday’s knock-down, where I added again).
Silver is not only in breakout mode above the rim of its 31 year long Cup, it is also finally aligned with the proper macro (inflationary), which I am and have been a stickler for. The ‘inflationary macro’ view was updated most recently on Friday in a public post.
The big picture target based on the Cup’s measurement is 92. That’s the fun and simple stuff. Let’s dig into the macro stuff, which is where the rubber meets the road between hype and reality.
I was somewhat suspect of the Thanksgiving week breakout in silver and the Silver/Gold ratio, but now post-FOMC in mid-December, the process has continued. Any volatility due to the immensely overbought situation could see a grind in the 45 to 50 area in the coming months. But when we projected the Inverted H&S (and its moderate target in the mid-30s) we’d have taken 45, eh?
But It Didn’t Come Easy
Technically speaking, this is a profoundly important breakout that I, maybe you and many others have anticipated since the Cup made its right side rim in 2011. But as I also used to note over the ensuing years…
Of more interest is the big picture macro, and silver’s role in it. We can intellectualize that silver is on the U.S. list of critical minerals. Or that covert entities are finally being forced to cover their paper shorts. Or that global warehouses are running thin of supply, and any other ghost story you want to conjure.
But the fact is that when silver leads gold (as the more inflation-sensitive side of the “metallic credit spread”), the backdrop is indicated to be cyclical-inflationary. If gold were relatively strong (with both metals declining) it would be the opposite, counter-cyclical and deflationary in its signaling.
That is why silver bulls were so often met with disappointment in the old, now defunct, disinflationary macro. You can’t force the macro at any given point. It should be defined and worked within.
New Macro, New Rules
A positive view of silver completely marries up to the theme of our recent analysis (ref. link above) of a new macro. This “new macro” indicates that new inflationary (liquidity) operations by policymakers will be less successful * than in previous decades, when the bond market indicated no real inflation problem. With long-term yields in big picture breakout mode, the indication is that yes, it’s going to be a BIG inflation problem for all to see (and feel).
* Success defined here as the ability to fool the public into believing that they actually fight inflation rather than create it.
In short, they’ll be trying to inflate in the light of day as opposed to under the cover of the bond market’s previous disinflationary trend. Maybe that is why silver is finally launching in an overt move, and why the stock market appears doomed to fail badly in gold terms, even as inflation may keep it moderately aloft.
Silver/Gold Ratio to the Fore
To further burnish the macro theory above, the Silver/Gold ratio will need to continue to rise. This long-term chart shows that it has not done anything remarkable yet. As you can see, and as we projected last spring, there are often spikes or extended rallies in the SGR after significant declines (red boxes).
The SGR is still on a spike, and has taken out two highs that we noted would have it be taken more seriously. Now the 2021 high needs to be taken out to keep the play going.
Dialing in closer, you can see the next objective. The reason for paying so much attention to this despite the chart view showing it has not even done what it did in 2021, let alone what it did in 2011, is because of the new, inflationary macro thesis per the 30 Year Treasury Yield chart above.
Let’s now back off our little silver hype fest after viewing one more chart. Since the stock market pretty much is the economy these days and since gold is already making positive moves in relation to SPX, let’s realize that silver has spiked right to a very key level in relation to SPX.
Break through here and things could get wildly bullish for silver. But this is also a classic spot for the forces of evil to make an appearance. A fine line between silver bug pleasure and pain.
Let’s remember that to this point, while the silver bugs are frothing, the average market participant is too busy wondering why his Bitcoin and AI stuff is going down. In other words, sure, silver is big in the gold/silver bug “community”, but the precious metals – including gold stocks – are still an acquired taste among the masses. If Silver/SPX breaks through here, those masses will not only taste silver, they’ll start gulping it down.
Bottom Line
Bull markets are scary. They become very overbought. They present reasons why people should take their profits while they have them. But then they keep going up.
Silver is wildly overbought and thus, scary. But mitigating that is the fact that your letter writer for one has been going on about a new macro since 2022, while trying to define what is new about it. That work is coming into clearer view and it favors silver and gold. It, in its inflationary macro signaling, also favors silver relative to gold. At least for the time being.
I have existed through all those years/decades of ignominy prior to the change in the macro as indicated by the “Continuum” chart. So I am weighing the pressure built up over those years. I am thinking about beach balls held under water and released, slingshots and rebellions.
In short, I am trying to be measured as usual, but aware that the bullish dynamics are currently justified by macro signaling.
All of that said, I for one am going to remain the same conservative trader I usually am. Friday’s little pullback was a hint, a reminder that the pullbacks will come and they will be harsh. Speaking of the precious metals in general and silver in particular, I’ll manage risk by taking out insurance (e.g. SLV puts taken previously) at certain points along the way. But the bull market is gaining steam on the big picture.