Guest Post: "Byzantium" Prepares For A Silver Spike

Longtime Turdite "Byzantium" submitted this "guest post" recently, which he compiled with a little help from his pal, "Pining4theFjords". I think you'll enjoy reading it.

Readying Oneself For A Potential Price Spike In Silver, by Byzantium

Most of us have experienced one of the two historic modern age silver price-spikes. Some (like me) played the 2011 spike up very badly, and want to be smarter next time. Each of us will have his or her own understanding of the context within which a silver spike sits. Do you have your plans ready as to what to do, if/when we get a third spike up?

First, here are the two spikes, from 1980 and 2011, unadjusted for inflation. These particular spikes up, crashed back down each time. Fortunes were made and lost on these spikes. The losers did not expect such a violent collapse in the price. Will we be third time lucky, or might the bulls be punished yet again?

Let us look more closely at 1980. Wow!

I don’t mean ‘Wow, look how fast it rose.’ I mean, ‘Wow, look how fast it fell, once it turned south.’ And more than 30 years later, we have still not exceeded the nominal $50 dollar high (a high not shown on this chart, but it got there).

The second chart is silver from April / May 2011.

Same again; it fell $6 in minutes! And that was just for starters. Many silver-bugs were paralyzed with shock. Hardly any PM bugs, no matter how clever we thought we were, took advantage of the $49 price to take profits, a level which was obvious historic resistance. Just as the gold or silver-bug mindset was thinking ‘the cartel is losing control, we are getting ready for blast off,’ the price instead collapsed, and blew a hole a mile wide, into what we thought were our superior insights.

Let us now distinguish between those of a trading mindset (which will de-facto include traders, but also many non-traders who are prepared to sell at the right price) and stackers (who will not part with their silver at any fiat price, till after a financial re-set). For stackers, thus defined, this presentation is likely not for you.

The table below sums up the outcome matrix of the next spike up. Naturally, if/when such a spike arises, there will be very emotive and even vitriolic argument in the trading community, as to the nature and sustainability of the spike. You may or may not agree with my classification of winners and losers inside the matrix, but I think it encapsulates the 8 scenarios of interest.

This presentation will focus on the last of the personality options, as highlighted in green below.

Fundamentals of this presentation:

  1. Stacking and Trading are the opposites in terms of approach. We cannot know in advance which is the right approach to apply, because we cannot read the future. We can however, moderate the risk/reward equation, by blending the two strategies, tailored according to our personal view of the nature of the spike that confronts us. Effectively, this means divesting a defined proportion of our stack, in a flow, in accordance to some schedule of price progression.
  2. There is enough kindling under the silver market today, to create a commercial signal failure and a silver price moon-shot, without the need for a currency collapse. The rest of the economy would be functioning as normal, while silver does its thing. In this scenario, the silver price spike is not likely to be permanent, and the price is expected to collapse again, once shorts are covered and hoarders provide supply. It may even settle at a higher price level, but there will be an historic peak along the way.  New bag-holders will arise, and new winners.
  3. Gold and silver do not tend to explode upwards at the same time, or the same rate. Silver peaked in April 2011, while gold peaked in August/September 2011. A commercial signal failure in silver, will leave gold for dust for a short period. Disparities are created in the gold:silver ratio at such times, that are to be exploited. If silver gets ahead of gold to a level that is expected to pull back, then gold becomes cheap relative to silver at that time. This permits holders of silver, to buy gold cheaply, using their silver. This is known as trading the GSR, or ‘Gold:Silver Ratio. It is an excellent way of cashing in on silver strength, without getting off the PM train!
  4. For those who take the spectre of confiscation seriously, then never divest all your silver as a trade. Owning some silver is a hedge against gold confiscation.
  5. Don’t forget about something called tax. What you sell profitably, will likely be taxed. Please factor it in.

Before pressing ahead, note that until the dollar collapses, then stackers will be missing the opportunities presented by interim silver price-spikes. Even worse than ignoring the stupendous opportunity that a silver price-spike presents to holders of silver, the stacker mentality may perceive the spike as a signal to buy, when they should likely be selling! Traders will be wrong one day, but until then, they have been busy getting rich, while deriding stackers.  The realistic potential for the silver price to spike up as a temporary phenomena and without an economic collapse, is a core assumption of this presentation. If you disagree with this, then this is a second reminder that this presentation is not aimed at you.

Before moving on to suggestions of how to play the next spike, whose nature may not be clear, note that this is not investment advice, as am not qualified to give it. I am a self-confessed loser from 2011, and this presentation is to get you planning, rather than to direct your planning.

Crafting a provisional strategy:

A core principle of this presentation, is that once a price spike gets going, events may outstrip your ability to devise a sensible strategy on the hoof. If you misinterpret the price action, you can either miss the spike entirely, or divest too soon, and watch in frustration as the price continues to rise.

I suggest here a framework for constructing a strategy.

There are four decisions that you have to make before you can flesh out this framework so that it is tailored to you, and I provide here some examples purely for illustration.

  1. What percentage of your stack is available for divestment? This is your ‘Trading Portion.’ (The remainder is not for sale, and is your wealth preservation, and/or insurance against currency collapse, or against gold confiscation)..... Let’s assume 40% is not for sale.
  2. Will you be divesting into cash, or gold, or both?.... Let’s assume into gold.
  3. At what price, or GSR, do you feel is the trigger to start divesting?.... Let’s assume from a GSR of 50.
  4. At what price, or GSR, do you want half of your Trading Portion divested, and with half still remaining to trade?..... The first historic resistance is at a GSR of 30 (from 2011), and thereafter at 16 (from 1980). Targeting a GSR just before these critical levels, are good points to accelerate divestment. Let’s aim for a GSR of around 30.

This example is simply to illustrate the mechanics, and is in no way a recommendation. Your own choice of parameters may be very different. Within this example will appear to be three strategies, but they are one, as will be explained. There are three, because your assessment of the nature of the spike might change several times, and suddenly. Stick to the middle path when uncertain.

Let us remind ourselves of the historic GSR. Note that the average over the last 20 years or so, has been at or just under 60, but we have rarely been under 50 for the last three decades. There are many ways to interpret this graph, but I consider gold to start becoming cheap in terms of silver, once under a GSR of 50.

OK, here are our three default strategies, based on our earlier inputs into the model, fine tuned according to taste. We have:

  • a strategy catering for a bullish assessment of the silver spike, expecting fantastic progress that we wish to preserve most of our trading portion for.
  •  a bearish ‘take no chances’ approach that anticipates a massive smack-down without warning, prompting us to make hay while the sun shines. This is the ‘bird in the hand’ approach.
  • neutral, middle ground, useful for when we simply cannot make up our minds. Perhaps the middle curve ought to equate to what we think is the likeliest outcome for the spike.

All three curves would ultimately be constructed by yourself, based on your own assessment of the likely nature of the spike.

Note at which GSR levels for each curve, you will still have half your tradable portion. This should be a conscious decision made by you in advance, while your thoughts are measured and clear, as to what is appropriate for each of the three thought-streams (bullish, bearish, neutral). The halfway point, in this example, is when we are down to 70% of our original stack, and is shown by the orange line. At this point, we will have expended half of the 60% allocated for divestment.

Once in a hot situation, you may be unduly influenced by the debates and views that will be raging at the time. If you allow these debates or views to influence you at the time, then let your own version of this chart, that you yourself will have already constructed when of sound mind, define the limits of your bullishness or bearishness, and stick to it! Do not deviate from this range in a hot situation, in which you risk being led astray by greed, fear, rumour, misinformation, spouse pressure, or your emotions.

THAT is the significance of the three lines comprising one strategy; they are a range beyond which be dragons. Construct the lines to your taste in advance, and use them to guide you through the emotional storm of a price-spike, in which your capacity to reason will be degraded by emotion and adrenaline.

In the space available, I cannot go into too much detail into the alternative divestment route, which is to divest to cash. I present a chart and let it speak for itself. $50 is the only resistance level factored into this example. All the main principles are the same as the GSR route, which I repeat below for good measure:

  • Too much time is wasted trying to predict the future. We can position ourselves for all outcomes, and so do not need to know in advance, the exact nature of the price spike, or the day or level at which it will peak, in order to extract some benefit. We can have our divestment strategy ready.
  • It is too late to respond to the spike ‘on the hoof.’ Prepare your strategy now, according to your risk appetite and broader beliefs about silver. If the spike comes, stick to your strategy, as defined by the boundaries set by the bullish and bearish curves that you constructed.
  • Take note of, and factor in, historic or likely resistance levels.
  • Sell into strength, and do not be a buyer into strength. If you missed backing up the truck at the lower silver prices, then restrain yourself from chasing price. The entire premise of this essay, is that you were ahead of the market, and payday has now arrived!
  • Retain a core silver position as your hedge against both currency collapse, and gold confiscation.
  • Don’t forget about tax.

Summary

We don’t know where the top will be on a price run-up, but the penultimate chart above demonstrates examples of cumulative divestment at various GSR points, while showing what ammo remains if the ratio just keeps reducing.

If a better greeting for a silver price-spike is available, then please share it with this community. The strategies charted above are prompts for discussion. I hope that even in the absence of discussion, that the reader finds them useful. Regardless that they may be just a starting point to formulate a final strategy, they nonetheless assert that there is a possibility to prepare in advance, an objective and coherent response to a spiking silver price, whose top will be unknowable in advance. The intention is a calculated, cool-headed and measured divestment strategy all the way up to a sudden and dramatic price turning point, that seeks to avoid having expended too much or too little of the stack.

Good luck to all, and let us help each other with ideas towards planning for this anticipated silver event!

Acknowledgements:

Many thanks to Pining 4 the Fjords, who provided key editorial support & encouragement that helped put this essay together.

407 Comments

sandy beach dave's picture

first

first

tpbeta's picture

Bah - second

My fault for reading first paragraph. Too damn interesting.

rocoach's picture

Thirst!

almost!

erewenguy's picture

whoa - don't start without me!

whoa - don't start without me!

prius_driver's picture

I do not like green eggs and ham

I do not like them in a house.

I do not like them with a mouse.

I do not like green eggs and ham,

I do not like them, Sam I am.

I Run Bartertown's picture

Great Advice

Though I can imagine some difficulty differentiating between 'being swayed by emotion' and 'reevaluating based on new information' when the time comes.

achmachat's picture

this place rocks.

this is good!
as in... really good!

thank you guys. I actually needed this today.

Byzantium's picture

aha

I'm just back from being offline.

My 15 mins of fame!

PS: EIGHTH!

Turd Ferguson's picture

McShirley to Murphy

MODERATOR

http://www.zerohedge.com/contributed/2013-03-05/james-mcshirley-comments-lemetropole-cafe-virtually-every-manipulation-i-foll

Bill,
 
It's getting monotonous, and just incredible how iron-fisted the cartel has become. The 90% probabilities just keep on going. Virtually every manipulation I follow is in the 90%+ category. An amazing 33 out of the past 36 PM fixes have been lower, or no higher than $5 from the AM fixes. Selling commences in almost every Comex trading session, with plans A, B, and C daily fare. Watching these patterns set up like clockwork makes you wonder who could possibly take the opposite (wrong) side of the trade 90% of the time.
 
Are hedge funds THAT oblivious to the cartel's ways? It defies all trading logic to watch what has become the cartel version of the basketball Harlem Globetrotters mowing down the Washington Generals. I used to say it was analogous to the WWE. Hell, even a WWE match has at least in theory has a chance of NOT being a predetermined outcome. There not only isn't a single day that goes by that's not manipulated, with high speed algos there now isn't a millisecond that goes by.
 
With NFP looming on Friday and April gold op. ex. coming in 3 weeks on the 25th you'd have to believe they're highly motivated to keep this clamp on, at least short term.  
 
Many investment advisors have proclaimed that, "they don't care if gold is manipulated, because even if it is it allows us to accumulate gold at lower prices". The "us" they refer to unfortunately no longer includes such bright minds as Ferdinand Lips, Adrian Douglas, and 
now Peter George, who never got to see a free gold market, and the full rewards of their skill and knowledge. People that don't care whether markets are free are spineless tools, and a disgrace to this industry. Lips, Douglas, George, and the other GATA warriors who have passed away will be remembered for fighting the good fight, and in doing so helping rid future generations of financial tyranny.
 
That's a worth that isn't measured in bank accounts reflective of being paid shills who don't care about financial crime.  
 
James McShirley            
 
heyJoe's picture

@byz

Why didn't you come up with this in 2010?  You could have saved us a lot of  money and anguish. wink

Thanks for this strategy.

koan's picture

Ooh, the content around here

Ooh, the content around here (as always) AND finally the action in the metals is getting tasty...

Byzantium's picture

on a serious note

This article was effectively written 2 or 3 weeks ago.

Since then, I uncovered the curious data about what is potentially the enormous silver stockpile that has accumulated in the UK. I interpreted this as ammo to be used to short the metal, but the majority (probably quite rightly) see it as evidence that big players have quietly accumulated, and are overtly long.

A summary of the official UK data is brilliantly presented by JY896 on page 8 of the previous thread, 'Bernanke's victory.' It is all you need to read! If (big if) we can take the data at face value, it is both mind blowing and unprecedented silver activity. Between a third and a half of global annual production ended up in the UK in 2012, and stayed there. There's the reason for your silver shortage (if indeed correct).

So, the jury is still out on whether we are reading that data correctly; but if we are, then big players are massively positioned with physical to go long, and it could blast off at any time.

To whit, this article above is indeed timely, and possibly quite urgent.

(edit: Maybe just under a third, but still unprecedented). 

AGAU's picture

Insurance

How about "chasing" the rising price with some puts?  ETF ultra short silver etc? maybe ZSL calls? 

If the price keeps going up you lose the "insurance" value in the puts/ ZSL calls etc  -  if it gets the usual smacking you keep your stash and make out on the puts?

One thing for sure Silver and Gold will be kept under the thumb as long as the EE want it there ! maybe they will allow  a nice spike here and there make a killing on the way up and  slapping the snot out of the retailers on the way down _ make a bunch of easy Moolah both ways  -- its worked for the bastards before and I am sure it will work again!

meanwhile I'm gathering nuts and hiding em (oo-er!)

jaw777's picture

Many thanks

To Byzantium and Pining for a great piece.  As someone who has let his emotions mess with his strategy, this is very important. 

Dawg's picture

Woof

Been there, done that!

Thanks for the reminders....

And insight.

Dawg

NonoverlappingMagicCereal's picture

Any advice on what to do...

...in the event that the gradual decline of silver continues for years to come, with no significant run up?  I suppose such an article would be much shorter around these parts (keep stacking?).

Byzantium's picture

@ HeyJoe

I'm not really in teacher mode here; I am not qualified. Turdville has some smart cookies, and I am hoping we can collectively log all the ideas and forge some sharp conclusions.

I got burned in 2011 and do not plan to get burned again; I plan to blend the best strategies available, whatever they are, that might arise from this thread. In addition, some hard core TA and professional trading devices might not suit or be available to us mere mortals, but there are principles that we can all follow.

When the day comes, I want to be ready, and know exactly what I must do.

¤'s picture

Nice job Byz

yesyes

cpnscarlet's picture

Absolute Confirmation of Silver Spike Coming

Found a silver dime (1956) in my change this morning.

OK - you can start breathing again.

erewenguy's picture

Excellent essay Byzantium!

Very nice work. A lot of meat here and definitely gives pause for greater clarity of mind prior to the heat of the moment. I will print it off and distribute to some hard metal bugs I know who seem to dislike the intertubes.

silvercity's picture

silver price spike.

I really liked the article.  Three or 4 months ago I had already decided that if we get another silver price spike this year I would sell at least half of my BV holdings.  My target price is 49.  Then, depending on the GSR I will go ahead and move the cash into gold with BV.   Of course, we can't predict the future.   But, I know myself.  If I don't have a predetermined strategy I won't do anything.  I plan to stick with this decision and make my move with as little emotion as possible when the time comes.  If silver goes thru 50 and continues to rise, I will still have some silver on the table, if silver goes down, which it probably will, at least I took some profit off the table before the raid happens.  Silver is too damn volitile for my blood.  I feel strongly that silver is not going to really shine until the dollar collapses and that could be a while.  

Bill of Rights's picture

Nice break out forming..

Nice break out forming..

Turd Ferguson's picture

3 charts

MODERATOR

القراع عصفور's picture

FUBM

thanks Byzantium and P4.  you got bowel movement BM the blow monkey running scared :-)

please, please hold!

ReachWest's picture

An Excellent Presentation

@Byzantium: Thank-you for all the hard work in putting this piece together. It's an excellent essay and prompts me to consider several approaches that frankly I had not considered previously. 

I have been an avid long-term buy and hold guy (The Stacker who sits tight in your presentation). I have never divested a single oz of my stack since I first began accumulating back on '07. As a consequence, I have missed a few opportunities to increase the stack by divesting an amount into the spikes and reacquiring on the dip back.

I'm still not sure that it would be my strategy to do this - my brain is so tied to the long term fundamentals that I never want to be caught offside when the ultimate final and steady rise takes place - but regardless, you offer a logical and well presented argument. yes

Louie's picture

HS we just hit 29!!!

Time to sell 70% of my stack!

Oh wait sorry. My emotions just got the best of me.

Byzantium's picture

@ ReachWest

thank you in turn for the compliment.

I think that the critical point for all silver stackers, is that whatever height the silver price reaches in our lifetimes, it will stay there for about a minute, and then cue devastating waterfall, even if to a higher baseline than before. It will almost certainly  not flat-line at or even near the price apex. (Gold might be different; it might be revalued to a new, flat high).

This is probably the most powerful motivation to engage the topic; it confronts us all. It is epic in the need for a strategy to reap the harvest of a lifetime of waiting.

Road_Scholar's picture

Good stuff!

Thanks for putting together! 

However, I must admit with my small handful of coins it's really a matter of just working hard for Federal Reserve Notes to convert to a few PMs.  I'm a dollar cost average stacker but maybe I could switch between ASEs and 1/4 AGEs depending on Gold/Silver Ratio...

will-work-for-food.jpg

Turd Ferguson's picture

A little levity

MODERATOR
Road_Scholar's picture

Shhh- don't tell anyone the bankers' secret

From Sovereign man:

Sovereign Valley Farm, Chile

In official testimony before Congress in December 1912, just three months before his death, J.P. Morgan stated quite plainly:

"[Credit] is not the money itself. Money is gold, and nothing else."

(the quote is almost Shakespearean in its unrhymed iambic pentameter...)

Of course, this testimony came only 253 days before H.R. 7837, better known as the Federal Reserve Act, was introduced on the floor of Congress.

The Federal Reserve Act went on to become law and pave the way for the perpetual fraud of fiat currency which underpins our modern financial system.

And if unbacked paper currency isn't bad enough, we award dictatorial control of the money supply to a tiny handful of people, and then simply trust them to be good guys.

Between the four of them, Masaakai Shirakawa (Bank of Japan), Mario Draghi (European Central Bank), Mervyn King (Bank of England), and Benjamin Shalom Bernanke (US Federal Reserve) control an astounding $8.85 trillion.

And given the speed with which they are printing currency and expanding credit, it's a number that's only going to increase.

Morgan was right. Credit is not money. The word credit comes from the Latin 'credere', which means 'to believe or trust.'

And when it comes to maintaining the purchasing power of their currencies, these guys have an absolutely stellar long-term track record, completely unblemished by success. In short, they have given us no reason to trust them.

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