Trader’s Narrative

Bob Prechter on Silver & Gold
By Nico Issac
In case you hadn’t noticed: Over the past year of financial turmoil, the “safe haven” premium of precious metals has offered about as much support as a rubber ducky in a tsunami. Despite a string of powerful rallies, silver and gold remain well below their March 2008 peaks.

It goes without saying that the greatest opportunities in precious metals were not had by those who played the “disaster hedge” card; but rather by those who timed the trends as they developed, regardless of the fundamental backdrop.

Bob Prechter is in the latter group. Amidst the buzz and whirl of the most bullish backdrop in precious metals’ recent history, gold and silver prices soared to new, all-time highs and calls for a “New Gold Rush” and “$30 Silver” flooded the mainstream airwaves. Yet Bob alerted subscribers to an approaching top in the March 14, 2008 Elliott Wave Theorist.

“The wave count [in silver] is nearly satisfied, though ideally it should end after one more new high. If this analysis is accurate, and silver does peak and begin a bear market, gold is likely to go down with it.”

In the days that followed, prices in both metals fell off a cliff. In turn, Bob was asked to address his exceptional call for a turn down in a March 19, 2008 Bloomberg interview. Here are of excerpts from that conversation:

Bloomberg: “Why did you put out that call on Friday (March 14) about a peak in precious metals?”

Editor’s Note: You can download Bob Prechter’s 5-page report, Gold & Recessions, free from Elliott Wave International. It features 63 years of historical analysis that reveals how gold, T-notes, and the DJIA have performed in recessions and expansions.

Bob Prechter: “One of the reasons is that it seemed like an absolutely sure thing. We track several indicators of sentiment. One of them is the Daily Sentiment Index (DSI). That reached 98% bulls on a one-day basis going into this last high. We were tracking silver as well… as it is clearest in our minds. Now, at the time, we needed one more slightly new high. That happened Monday morning and silver dropped 15% in 48 hours. That’s a heck of a reversal and I think it’s real.”

“Real” indeed: From their March peaks, gold prices plummeted 34%, alongside a 60% sell-off in silver before hitting the breaks in October. Here, the October 2008 Elliott Wave Financial Forecast prepared for a corrective rebound and wrote:

“Silver traced out a five-wave decline from its March peak…Gold should also rally as silver pushes higher. Once silver’s rise is exhausted (initial target: $15.15), the larger downtrend should resume for both metals.”

A powerful, four-month bounce ensued in both metals: Gold prices came within kissing distance of its March peak before turning down on February 20; silver followed suit — a fulfillment of this bearish, near-term insight presented in the February 23 Elliott Wave Theorist:

“Silver has been clear as a bell. Silver is due to turn back down, and gold, which is back at $1000/oz, is likely to follow.”

Since then, it’s been a steady march lower for both metals. Obviously, EWI’s forecasts do not always prove this accurate. Yet in this case the analysis speaks for itself.

For more metals analysis from Bob Prechter, download Gold & Recessions a free 5-page report from Elliott Wave International. It features 63 years of historical analysis that reveals how gold, T-notes, and the DJIA have performed in recessions and expansions.

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

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I had never heard of the Daily Sentiment Index (DSI). Anyone know anything about it? I do know that market timing newsletters tracked by Mark Hulbert that specialize in gold and gold stocks have turned very bullishness since mid February 2009. They upped their exposure from -16.5% (short) to +30.2% (long) within that short time span.

While Bob Prechter’s Elliott Wave Theorist is most commonly known for its bearish stance towards equities, their equity focused newsletter: the Elliott Wave Financial Forecaster is up 22.8% for the past 12 months, compared to -43.3% for the dividend reinvested Wilshire 5000 Index (according to the Hulbert Financial Digest). They seem to have the hot hand now. Check’em out.

Forget gold and gold stocks. It is time for silver to shine in the precious metals’ sector.

At least that’s what the Commitment of Trader’s report is telling us.

Lately the commercials have been been net short the least number of contracts in five years. Since they are almost alwas net short as part of their usual business, what matters is whether they are really, really short or just a little bit.

Right now the most knowledgeable players in the silver market want to limit their exposure to a potential rise in the price of silver.

The last time they had this nominal contracts net short was in the summer of 2003 when silver was less than half of what it is now. Even more meaningful, the small speculator isn’t excited at all. Eventhough the price of silver has shot through the roof, they are holding their smallest net long position in years.

In contrast, we are seeing the exact opposite in gold’s Commitment of Trader’s report.

So everyone is running around in a panic, dumping bonds and equities for fear that the Fed will increase rates to fight inflation. The 10 year bond yield, which everyone is watching like a hawk all of a sudden, has been blasting higher in anticipation.

Only thing is, I can’t seem to find any footprints of this inflation monster everyone is afraid of. But the markets are a forward discounting mechanism. Maybe they are sensing that inflation, although not here right now, is just around the corner.

True, markets do look forward and incorporate all sorts of scenarios but wouldn’t that same forward discounting mechanism be at work in markets like gold, silver, and the CRB (Commodity Research Bureau Index)?

Each of these markets is also a tell for upcoming inflation. And each of those tells is not confirming inflation fears. Gold, which I’ve already covered, is actually in what looks to be a topping pattern after a multi-year bull market.

The same can be said for silver (and perhaps with much more conviction). And last year, the CRB index broke its long term uptrend line. This trendline had been in effect since the double bottom of the CRB (in early 1999 and late 2001 at the 185 area) so it was very significant.

Getting back to the bond market, for the past 20 years, the 10 year bond yield has been in very orderly down trending channel. Everytime it has hit the top of this channel, bonds have rallied. This has happened about half a dozen times. Once again we are at the top of the channel.

Is it different this time?

The iShares Silver Trust gapped up this morning but otherwise, it was trading in a normal fashion with no crazy volume :

Not seeing a fast market, I had no reason to drill down to a smaller time frame. So I stuck with the familiar 15 minute chart and found the morning tape settling into a tight range.

Just after 10:30 am price broke out of the range and traded higher on normal volume. There is something to be said for these higher priced stocks. Especially when they trend like this

Curiously, the last time I spoke about SLV, was quite cynically and as karma would have it, that marked its swing low.

There is a well worn adage on Wall Street that says, when the ducks quack, feed them.

Want to see it in action?

Here’s the gold ETF from its IPO in November 2004:

And here’s the recent silver ETF: