SILVER CAPITULATION: Take Advantage of the Situation!
Who wouldn’t pass up a chance to effectively buy an asset for pennies on the dollar? Most investors, that’s who. Even though silver is a metal with dozens of industrial uses and has been used as money for millennia, when the going gets tough, too many traders simply cut and run.
You’ll see it in the headlines in the financial press during times like this. They’ll call silver the “poor man’s gold.” They’ll point to the gold-to-silver ratio (currently above 90) and say that silver is “weak” compared to gold (in modern times, the ratio averages around 60, though in ancient times, it was 25).
We see it differently, however. What they call “weak” we call oversold and a huge opportunity. Go back in history and you’ll see that silver staged huge rallies every time the gold-to-silver ratio even went above 80, not to mention 90. Shares of silver mining stocks typically rallied even more than silver itself.
What’s causing the current selloff in silver? It might seem counterintuitive that silver should be so cheap during a time of high inflation. It’s true that, historically, inflation meant that silver should go up; just look at what happened during the 1970s. This is bound to happen again in the 2020s but with a time lag, which means you have one more chance to get in before the rally.
As investors learned during Federal Reserve Chairman Jerome Powell’s Jackson Hole Symposium speech, the Fed is firmly committed to raising interest rates until inflation comes down. Powell confirmed this today in a separate speech when he declared that the Fed will raise interest rates “until the job is done.”
At the same time, the European Central Bank just hiked its own benchmark rate by 75 basis points. Over the next several meetings, the ECB expects that it will raise interest rates further to “dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”
Thus, we have a coordinated effort to slow down the global economy in an attempt to correct the central bankers’ prior print-and-spend policy errors that caused high inflation in the first place. The net effect, strangely enough, has been a strong dollar in 2022 so far.
The U.S. dollar is only “strong” compared to other fiat currencies, which are losing value rapidly just like the dollar. Dollar “strength” only means that the U.S. dollar is akin to the cleanest shirt in a hamper full of dirty shirts. Its strength is relative, not absolute, and certainly not sustainable indefinitely.
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The Fed policy that’s responsible for the relatively strong dollar has also caused the price dip in silver. For true contrarian investors, this is a window of opportunity to reduce the cost of your silver and silver miner positions.
I will be announcing this weekend a brand new pick in the silver world that we’re very excited about. Today, the price on the open market is 50% BELOW the IPO round. Even more astonishing, it is below the PRE-IPO round of CAD$0.39! More details to come on Sunday…
Think of silver and the dollar like two ends of a seesaw. If the U.S. dollar is extremely overbought and overdue for a significant downward correction then silver is oversold, underpriced, and due to swing up when the dollar finally rolls over.
M2 Money Supply Chart. Courtesy: TradingEconomics.com
As you can see in this chart that uses the UUP ETF as a U.S. dollar proxy, the dollar is stretched far above its range, which goes back 15 years. If the Fed backs off, be it through a pause in QT or a full-on pivot back to QE, the dollar-versus-silver seesaw will reverse immediately.
For the moment, though, don’t be surprised to see the typical signs of a bottoming process in silver. The telltale symptoms of extreme capitulation are all there: pessimism among traders and mainstream media pundits, lowered price targets, and even gold bugs are giving up on silver.
That’s what a bottom looks and feels like, and it’s uncomfortable to buy an asset when this is going on. It feels like you’re rooting for a baseball team that hasn’t won a World Series in 50 years; everybody’s against you, and you’re all alone in the long silver trade.
Yet, you’re not really alone because sophisticated investors know what’s coming. Smart money doesn’t brag about buying silver during the capitulation phase; they just quietly buy at extremely low prices and hold. Just remember that the amateurs will always be the loudest ones about their trades until they’re proven wrong.
When silver does finally seesaw back to the $30s, $40s, and $50s, you won’t hear much from the amateur traders who got it wrong. You will hear from TV pundits who will suddenly flip bullish on silver even though they didn’t get in when silver was absurdly cheap – just like it is right now.
Chief Editor, CrushTheStreet.com
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