May 19, 2019
- A long history for the Gold/Silver spread.
- The highest level in a quarter of a century.
- Silver has been stubborn, and the trend is [still] bearish.
- Is the Gold/Silver ratio telling us a rally in Silver is coming and Mean Reversion in the Spread is on the Horizon?
USLV [VelocityShares 3X Long Silver ETN] turbocharged silver volatility if a correction is on the horizon.
A Long History for the Silver/Gold Spread
The Silver/Gold ratio dates back 5000 years to 3000 BC when the first Egyptian Pharaoh Menes stated that two and one-half parts silver equal one-part gold. In modern days, since 1974, the average for the price relationship has been around 55:1 or 55 ounces of silver value in each ounce of gold value.
The Gold/Silver ratio the range over the past forty-five years has been from 15.47 to 93.18 with an average of 54.325. When the price relationship moves below 55:1, Silver tends to be historically expensive compared to the price of Gold. The last time the ratio was below the midpoint was in 2012. When it is above the midpoint level, silver is historically cheap compared to gold and these days, what is cheap is getting cheaper by the day.
The Gold/Silver Ratio is Now at the Highest Level in a Quarter of a Century
As of the close of business on May 13 with Gold at $1301.80 and Silver at $14.777 the ratio stood at over 88:1, a new high and the highest level since 1992 or twenty-seven years. The price relationship reached its modern-day peak at 93.18:1 in 1990. In 1990, the price range in Gold was from $346 to $428 and Silver traded in a band from $3.93 to $5.445 per ounce.
The Silver/Gold ratio made a new high on May 13, 2019 as Silver refuses to keep pace with the price action in the Gold market.
In 2018, the prices of both Silver and Gold tested the downside. Gold fell to a low at $1161.40 in mid-August 2018 under the weight of rising US interest rates and a strengthening dollar. The low was $115.20 above the December 2015 low and level of critical technical support in the gold market at $1046.20 per ounce. Silver waited until November to make its low for 2018, but it came a lot closer to the late 2015 and level of technical support than Gold. Silver fell to $13.86 in November 2018 which was only 22.5 cents above its December 2015 bottom at $13.625.
Is the Silver/Gold ratio telling us a rally in Silver coming
and a Mean Reversion in the Spread is on the horizon?
Inter-commodity spreads like the Silver/Gold ratio often provides clues about value and if the price of one commodity or the other is cheap or expensive. The current reading on the Silver/Gold ratio is screaming that either Silver is cheap, Gold is expensive, or a bit of both on a historical basis.
Over time, these types of spreads in markets that are closely related tend to revert to the mean or average over time. Silver and Gold are both precious metals. They both have long histories as a means of exchange, and both have industrial and fabricated applications. However, central banks around the world hold gold as a reserve asset, and they have been net buyers, while Silver moves higher or lower on speculative sentiment. In the current environment where protectionist policies are causing market turbulence, the risk-off activity has lifted the price of Gold and caused market participants to avoid the speculative silver market, for now. However, the silver market always loves to provide surprises. Silver is undervalued on a historical basis, and the weekly chart could be telling us that the market will run out of selling sooner rather than later.
Open interest or the total number of open long and short positions in the Silver Futures Market is flatlining around the 200,000-contract midpoint level. However, price momentum and relative strength metrics are both in oversold territory, and weekly historical volatility at 5.57% is far too low for the Silver Market. Silver has been in a bearish trend since July 2016, but a relief rally is long overdue. Moreover, the extreme deviance compared to the price of Gold is highly supportive of a corrective rally in the Silver Market if Gold can hold its recent gains.
USLV turbocharged Silver volatility if a Correction is on the Horizon
Aside from buying silver futures or ETF products like SLV on dips, trading the precious metal by buying USLV during periods when the price is under pressure and taking profits on a recovery rally can offer leveraged returns if price action alleviates the current oversold condition. The fund summary for the ETN product states:
The investment seeks to replicate, net of expenses, three times the S&P GSCI Silver index ER. The index comprises futures contracts on a single commodity. The fluctuations in the values of it are intended generally to correlate with changes in the price of silver in global markets.
USLV has net assets of $224.18 million and trades over 204,000 shares each day making it a liquid product. However, the leverage comes at a price which is time decay. If silver moved lower or sideways, USLV will quickly lose value, and the ETN is always susceptible to reverse splits which destroy its value. Therefore, triple-leveraged products like USLV are only appropriate for short-term forays on the long side of the market. On May 2, 2019, July silver futures hit a low at $14.57 per ounce, and on the next day, it traded to a high at $14.995, a rise of 2.9%.
Over the same period, USLV moved to a low at $57.81 and rose to a high at $62.82 per share or 8.7% which was triple the percentage move in the silver futures market.
The Silver/Gold ratio is at the highest level in twenty-seven years, and the price action displays an oversold condition. If a short-term rally is in the cards for the Silver market, USLV could be a tool that enhances your results, but - - - make sure to take a profit, before time decay turns a profit into a loss.
Hecla Mining Company
Last spring, Vancouver-based Hecla Mining Company’s chief executive Philip Baker Jr. announced a $600 million deal to purchase three (3) Gold Mines in Nevada at a 59 per cent premium.
Baker assured investors his company conducted extensive due diligence to justify the hefty price tag.
“There isn’t anyone on the planet who knows this asset better than us,” he told the Financial Post.
About one year later, Hecla has initiated “a comprehensive review” after running into a flurry of problems in Nevada, including “unacceptable” costs, lower than expected production, problems expanding the mine life, excessive water in one mine and other issues. The mines produced 10,000 ounces of gold in the first quarter, down from the 162,000 annual production estimate given at the time of the purchase.
A Hecla spokesman said the review would take “a period of weeks or even a month or two,” and added that the excessive water was an issue that the company did not anticipate.
Multiple analysts have downgraded Hecla, raising questions about how it will refinance $500 million in unsecured debt, due in 2021 if bond ratings agency were to review its credit.
Invoking Forrest Gump, John Bridges, an analyst at J.P. Morgan compared Hecla’s Nevada mines to a box of chocolates. “The wrapper seems to have been a poor indication of what was inside,” Bridges wrote.
My Point of view: If the above analysis dated May 15, 2019, is correct then - - - therein lies the Buying Opportunity!
As you know, Hecla Mining is one of my most Favorite Senior Mining companies:
- It has large Silver resources together with a large Zinc-Lead component.
- The Gold/Silver ratio Mean Reversion in the Spread is on the horizon.
- The Company is Cash Rich and consequently, is in a position to buy or invest in undervalued Mining Exploration companies that are drastically undervalued such as Klondike Silver www.klondikesilver.com .
I am heavily invested in Hecla Mining and continually add to my Senior Mining Portfolio - - - and so should you!
Gold, the Dow, S&P 500 and the Nasdaq
NY Gold Nearest Futures
Gold was Up and Down this week. We reiterate that Gold will still go below $1,000.00 and below $981.50.
Stay Invested in Gold stocks especially the Juniors with Management you trust and who will create great Return on Investment for their Investors.
Dow Jones Industrials Index Cash
Wall St continues to be remarkably calm in the face of a blow up of China-US trade talks and we still do NOT see a Major Correction in the Indices
The US Indices in the Dow, S&P 500 and the Nasdaq were Up and Down this week.They all closed Down on Friday
We continue to buy good US Stocks with Management we trust.
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May 15, 2019 - The Annual Silver Supply is in a Major Decline and the Downtrend is Getting Worse
If you are interested in Silver and its Price as we move forward - - - then this essay by Jeffrey Christian, Managing Director CPM Group, is a very interesting Read
May 15, 2019 - Trump Grants Full Pardon to Former Media Baron Conrad Black
Finally, a travesty of justice has been reversed and corrected by Donald Trump.
Conrad Black stuck to his guns, and in the end, he won!
- May 18, 2019 – Canada Parliament Hill Excavation Uncovers Pre-Confederation Military Complex
This is for Canadians and all those that love excavations finding historic events.
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From Mining Interactive Corp. in Vancouver, Canada
Nick L. Nicolaas
Direct: +1 (604) 657-4058
Nick L. Nicolaas, Mining Interactive Corp. and its Associates (collectively referred to as NLN) are not registered advisers and do not give investment advice. NLN’s trading comments are an expression of opinion only. NLN may have an investment in some of the companies or trading instruments NLN mentions or writes about, nothing should be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While NLN believes all statements to be true, they always depend on the reliability of NLN’s sources. NLN recommends that you consult a qualified investment adviser, one licensed by the appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions and NLN urges you to confirm the facts on your own regarding any trades or companies NLN mentions before making important investment commitments. The “Stock and Private Placement” alerts written and distributed by NLN do not, and cannot, constitute a recommendation to buy or sell any security.
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The material in the “Trading Based on Martin Armstrong Socrates Alerts” and the “Stock and Private Placement” alert letter published by Nick L. Nicolaas is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The “Trading Based on Socrates” and the “Stock and Private Placement” alert discussion contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. NLN owns shares in B2Gold, Meadow Bay Gold Corporation, Ashanti Gold Corp; Klondike Silver Corp; Organic Garage; Northern Dynasty Mines; Exeter; Arrowstar Resources, Klondex Mines, Dynasty Gold, and Blue Sky Uranium. Please consult your financial adviser and perform your own due diligence before considering any companies mentioned in this informational bulletin.
May 19, 2019