Silver superspikes: dollar-bullish, and they don’t last

First, the 25-year monthly chart:


Here’s a chart that goes back further but only goes up to 2010 (I couldn’t figure out how to get to draw me the whole thing, but you can just use your imagination – the line just goes straight up from $30 to $45):


Gold’s march upwards has been much more orderly, but silver is a thin market and prone to spikes. These things are tough to short, and to attempt to do so you should wait for a pause and use a stop above the highs, but even with a stop a fast market like this could spike dollars in minutes or seconds and close you out at a big loss only to reverse. This chart doesn’t show the action that happened intraday one day in Jan 1980 when silver traded over $50 very briefly.  No reason why it couldn’t spike to $70 next week only to crash and languish at a new normal of $10-20 for the next two decades.

It is safer in a way to buy puts than to short SLV or sell futures, since your risk is defined – you can only lose what you put up. The July 35-strike puts on SLV were going for less than 60 cents on Wednesday, and will get cheaper every day until silver falls. June 35s are under 40 cents and will decay faster but pay off better in a crash. At any rate, I’d take a disciplined approach and figure on losing my premium at least once, buying higher strikes if the spike continues upwards. Losing the first premium or two would be acceptible if a later position pays off 10:1.

Take another look at this long-term dollar chart. We had a major bottom in 1980 just as everyone was panicking into precious metals.  Silver spikes are apparently another symptom of extremely negative dollar sentiment, so should be considered bullish for the currency.


BTW, though gold’s price and action is much more sensible, the silver spike is very bad for gold as well – it may just have doomed its bull market. The metals have more than adjusted for the inflation of the last 30 years and the money printing of the last 3. It would make sense for their run to end soon and for them to settle into some middle ground. That doesn’t mean gold can’t touch 2500 and silver can’t hit 100 – it’s just that these moves are too fast and too high relative to their historic multiples to other assets, so these prices will not last.

Long-term gold charts (first one is a few weeks old – the second is current but doesn’t go back as far):

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4 thoughts on “Silver superspikes: dollar-bullish, and they don’t last

  1. I guess it all depends if they do QE3:

    1. If there is eveidence of increased inflation between now and June … all bets are off …. the FED will not push QE3 … and USD reverses course with the STOCK market and Metals reversing

    2. Indeed, the Fed HAS to engage in more QE 3 if it doesn’t want the entire market to collapse. Given the breakdown in Europe, the IMPLOSION in the Middle East, and the ongoing nuclear disaster in Japan, the removal of Fed liquidity would kick off a MASSIVE systemic Crisis.

    3. Remember, we had a full-scale market breakdown when QE 1 ended and that was because of Greece: a country with a GDP of $329 billion. Removing liquidity from the markets when Japan, the fourth largest economy in the world (if you count Europe as one economy), the largest Oil exporting region in the world (the Middle East), and Spain and Portugal are all breaking down would lead to an absolute market DISASTER.

    The Fed will not risk this. Besides it HAS to keep the liquidity going if it’s to continue supporting the TBTF banks in the US. Remember, 99% of what the Fed’s done in the last two years has been aimed at supporting the large, Too Big To Fail (TBTF) Wall Street banks. The reasons for this are:

    1) The Fed is in fact CONTROLLED by these banks via the Primary Dealer network

    2) Fed leaders are all front-men for Wall Street

    In order to understand these, you need to know that the REAL power of the Fed lies in its primary dealer network, NOT stooges like Ben Bernanke.

    Indeed QE’s 1, 2, and the coming 3 are nothing but an attempt to funnel TRILLIONS into these firms (and the other primary dealers).

    The reasons the Fed is engaging in QE rather than simply dishing out the funds are:

    1. Political outrage would be EXTREME if the Fed just gave the money away

    2. The Fed needs to support those firms with the largest derivative exposure

    The reason that the 2008 debacle happened was very simple. The derivatives market, the largest, most leveraged market in the world.

    Today, the notional value of the derivatives sitting on US banks’s balance sheets is in the ballpark of $234 TRILLION.
    Of this $234 trillion, 95% is controlled by just four banks.
    JP Morgan, BoA, Goldman Sachs, HSBC

    The above picture summates two things:

    1) Who REALLY controls the US financial system

    2) Why QE 3, 4, etc are guaranteed

    The Fed HAS to continue pumping money into the system to support these firms’ gargantuan derivative exposure. Failing to do so would mean a disaster on the scale of four to five times that of 2008.

    Remember 2008 was caused by the credit default swap market which was $50-60 trillion in size. The interest-rate derivate market is $200+ TRILLION in size.

    So I am certain QE 3 will be coming. If it doesn’t come in June we’ll get hints of it until it’s finally announced. The Fed cannot and will not stop the money printing. Bernanke will be forced to resign long before he takes the paperweight off the print button. Small wonder then that the US Dollar is falling off a cliff. Indeed, the way things are going, the Fed will push into a full-scale inflationary collapse within three months.

    So if you’re not preparing for mega-inflation already, you need to start doing so NOW. The Fed WILL continue to pump money into the system 24/7 and it’s going to result in the death of the US Dollar.

    However, the points in this essay are compellng:

    Bottom Lne to me –> The FED will continue to print money until it simply cannot. When a fallone of gas is at $5 and higher interest rates … then people will not be able to sustain themselves … without wage inflation which I do not see on the horizon.

    The game will be sustained until the limits have been surpassed with no regard to what happens to the common man. Playing with fire, the so called intelectuals think that the solution is higher inflation … not this time.

  2. Yes, the monetary base will likely continue to expand, but this doesn’t lead directly to inflation once you’re on the back side of peak credit, which we are. Witness Japan 1990 -> who knows? They have printed and printed and piled up the government debt, but the yen is stronger than ever. Inflation requires a net expansion of money + credit, and the pool of credit is much larger than the pool of base money, so despite the tripling of the monetary base since 2007, we’ve not had much inflation, and only in the last 2 years.

    The main problem with your statements from a trading or investing point of view is that they are so widely accepted. This is what 95% of market participants and observers beleive, so it is highly unlikely to have the consequences that most expect.

  3. ,
    bueno! Pls comment on
    1. “Y anks can now hold up to US$10k in RMB = yuan
    in big u ..s… bankcs’
    2. new regs for Y anks to hold fin accts o seas.
    What of houses, jewerly etc held directly not thru a
    ‘fin. acc.t’? Gracias

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