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:
- 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.
- 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.
- 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!
- 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.
- 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.
- 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.
- Will you be divesting into cash, or gold, or both?.... Let’s assume into gold.
- At what price, or GSR, do you feel is the trigger to start divesting?.... Let’s assume from a GSR of 50.
- 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.
- a 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.
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!
Many thanks to Pining 4 the Fjords, who provided key editorial support & encouragement that helped put this essay together.