Silver Prices - Megaphone Patterns

President Nixon closed the "gold window" in August 1971. That decision enabled the exponential growth of debt, paper currencies, and prices. A few examples:

Item	1971	2014
US National Debt	$398 Billion	$17,500 billion ($17.5 Trillion)
Dow Index	900	16,900
Gold Price	$41	$1300
Silver Price	$1.39	$21
Crude Oil	$2.20	$102
New Automobile	$2,700	$32,000

The process is simple and clear. Remove the gold backing from the dollar, enable the creation of nearly unlimited dollars and debt, many more dollars chase somewhat more goods, prices increase, proclaim it is "all good" and then create even more dollars and debt.

So what about silver?

Silver prices have increased but in a disorderly manner. Rather than focus on details, examine the big picture - 43 years of monthly price data in one chart - and divide that 43 year period into four "megaphone" shaped patterns on a log-scale chart. See below:

Zone 1: Silver accelerated higher from $1.39 in 1971 to about $50.00 in January 1980 - a massive bubble.

Zone 2: Silver crashed (bubbles always crash) down to $3.50 in 1991. In nominal dollars, this was a loss of about 93%. Adjusting for inflation it was even larger.

Zone 3: Silver "flatlined" for a decade and moved from about $3.50 in 1991 to about $4.00 in 2001.

Zone 4: Silver rallied post 9-11 in a new bull market from about $4.00 in 2001 to nearly $50 in 2011.

How will silver prices change in the next five years?

Door # 1: The upward slanting megaphone pattern continues and silver surges to $100 or more by 2016 - 2019.

or

Door # 2: A new megaphone pattern slanting downward (shown in red as # 5) has begun and will terminate at perhaps $6 in the 2016 - 2019 time period.

There are other choices than these two options, but it seems likely (to me) that silver prices will move much higher, while it is remotely possible that silver prices will continue their downward collapse, as represented by the above options.

The Bullish Choice - Door # 1:

1. Prices have been increasing since 1913 and rising more strongly since 1971. I see little to change this, short of a nuclear winter.
2. Global debt exceeds $200,000,000,000,000 ($200 Trillion) and is rapidly rising. We should plan on more crashes and bubbles in stocks, bonds, and currencies. Fear and a desire for safety will drive more investors into silver and gold at much higher prices.
3. The Stochastic and MACD indicators shown at the bottom of the graph show low readings that have consistently indicated bottoms in prices. Other technical indicators show similar "over-sold" conditions.
4. Silver prices are currently more than 55% off their highs. They have considerable room to accelerate higher.
5. The cost of silver production has been reported at about $20 per ounce. With energy prices increasing, that cost of production will also increase. I see little chance that silver prices will drop below $10 as the cost of production increases to $30 or considerably more.
6. Most government stockpiles of silver in the western world are gone.
7. New industrial uses for silver are discovered every day. Solar panel uses for silver will increase.
8. Many more not listed here.

The Bearish Choice - Door # 2:

(Sarcasm alert! I do not take the bearish view as a serious alternative.)

1. The governments of the US, UK, Europe, and Japan will become efficient, will wisely manage their resources and will no longer need to borrow massive quantities of their currencies in order to pay their bills. Consequently we should expect price stability or mild deflation in food, energy, and silver prices. Okay, just kidding...
2. Central banks have chosen to wisely manage their currencies for the benefit of the citizens and are "printing" in moderation because they wish to avoid dangerous increases in prices, debt, and the money supply. Okay, just kidding again.
3. "Silver-Bugs" are likely to sell their stacks of silver and buy call options on the S&P because they feel the S&P is a safer and better investment. Sorry, getting ridiculous now...
4. Too-Big-To-Fail banks and bullion banks are forecasting flat to lower gold prices through the end of the decade. Many individuals and money-managers still trust these banks and actually believe their self-serving propaganda. This misinformation negatively affects the prices for paper silver.
5. Even though silver has been money for thousands of years, it has been replaced by a superior alternative - pieces of colored paper. Back to just kidding...

Conclusions:

Over 40 years of silver prices can be represented by four zones of megaphone shaped price patterns. My interpretation is that zone 4 - a long and aggressive move upward - is still in progress. My round number target is $100 or more in 2016 - 2019. Although I hope that the powers-that-be will not choose to create hyperinflation in the US, if hyperinflation does occur, the $100 target will be easily bypassed and much higher prices will be "in play."

By: GE Christenson

European Stocks Plunge Into Red For 2014, Portugal Down 10% This Week As Espirito Santo Stock Suspended After 40% Crash.

But but but... the crisis is over and Europe is recovering? European stocks dropped 3.2% in the last 2 days - the most in 7 months - taking the broad index into the red for 2014. Portugal (remember how BES was contained) collapsed 10.3% this week (down 26% from its highs in April) to one-year lows.Europe's VIX spiked over 20 today - its highest in over 4 months.

 European stocks are red for 2014

Portugal led the decline...

• BANCO ESPIRITO SANTO SHARES SUSPENDED PENDING INFORMATION, CMVM SAYS

With Goldman bailing and the sovereign suggesting it is not willing to bailout, it appears - based on Sub debt's collapse - that a bail-in burden-sharing solution is coming. 

The Illustrated Guide To 20 Years Of Latin American Debt Crises

As the Argentina farce rolls on, it is worth noting that this is nothing new. As Bloomberg Briefs shows below,Latin American nations have been serial defaulters for the last 20 years.

Source: Bloomberg Briefs

Rising Dollar Pushes Commodities Down While China Drives Industrial Metals Up

The US dollar rose 2.20% in July, primarily due to the Euro’s decline. A combination of weak economic news and falling Eurozone assets are having a negative impact on its common currency as well as European stocks. 

US Dollar ETF rising in July

After a few months of flatness, the dollar made a big move, hitting a 6-month high. This surge had a negative impact on commodities. The CRB commodity index experienced a 5% decline in July, losing part of the ground gained this year.

CRB Commodities Index declining in July

A rising dollar has historically been bad for commodities and therefore this is also negative for industrial metals. However, industrial metals kept gaining ground this month thanks to stronger demand coming from China.

While global tensions (especially in Europe) made developed markets struggle, emerging markets had a very good month. Chinese stocks rose 10% in July, breaking out to the highest level in three years. The good news for China is very good for industrial metals as China is the biggest user of these commodities.

China iShares (FXI) hitting 3-year high

What This Means For Metal Buyers 

Industrial metals performed well in July thanks to positive news from China. However, commodities lost some ground to a rising dollar. A stronger dollar could have a depressing effect on industrial metal prices. The performance of industrial metals through the rest of the year will strongly depend on these two factors.

Source : Agmetalminer.com

The Best And Worst Performing Assets In July 2014 And YTD

Up until the last day of July, everything was going great: stocks were solidly up for the month, the DJIA was on the verge of 17,000, and the wealth effect was flourishing, if not the economy. Then yesterday happened, and everything changed: not only did the S&P turn red for the month, but the DJIA slid to red for 2014. So what is the best performing asset class in July? With the PBOC now openly unleashing QE in its economy, no surprise that it was the Shanghai Composite, which returned over 8%, if virtually nothing since 2009. However, don't expect this to last: for China real estate is orders of magnitude more important than the stock market to boost the wealth effect.

As for the best returning assets class in 2014 YTD: don't laugh - it's still Spain and Italy. Expect the day of reckoning for Europe's periphery to be fast, unexpected and very brutal.

From Deutsche Bank:

The last 48 hours have made a big difference to returns in July with a sell-off in rates, credit, equities and commodities changing the month dramatically over this period and leaving a few more markets down for 2014 now.

DM equities were tipped into negative territory for July while EM stocks had enough outperformance through the rest of the month to largely stay in positive territory despite the weakness in Russian equity markets. China was the key outperformer with the Shanghai Composite (+8.8%) posting its best monthly total return performance since December 2012. The rally in China also benefitted Hong Kong equities with the Hang Seng (+7.3%) recording its biggest monthly gain in two and a half years. Back to the DM world, the Stoxx 600 and S&P 500 were -1.6% and -1.4% respectively – with the former probably negative impacted by the BES-driven weakness in Portugal (-10.5%).

A poor month for the DAX (-4.3%) and CAC (-4.0%) has pushed them both into negative total return territory for the year at -1.5% and -1.2%, respectively. The FTSE was down -0.1% on the month keeping it in slightly negative territory for the year (-0.3%) although dividends have helped YTD total returns stay in the green. The DOW is also down YTD now.

Moving on to Fixed Income, it was a mixed month for core rates with Europe outperforming Treasuries. This is perhaps not surprising with core European rates flirting around their all time lows whilst USTs suffered a dip following the strong GDP print just a day before month end thus giving up about half of all of the month's earlier strong gains. Turning to Credit, it was modest month for IG total returns but nevertheless IG still did better than HY with US HY (-1.7%) underperforming on the ETF outflow story. Staying in fixed income but moving to EM, the overall benchmark was down 0.6% with strength in Asia (+1.3%) neutralising the weakness in Latam (-0.7%) and EEMEA (-1.3%).

The commodity complex had a very weak month with Corn, Wheat, and Brent all down -16%, -6%, and -5% respectively. Incidentally this also came during a fairly encouraging month for the Dollar bulls with the Greenback appreciating about 2% against a basket of major currencies.

To sum up the year to date performance so far, the European peripheral complex is still the key winner with the IBEX (+12%), FTSEMIB (+11%), Spanish Bonds (+10%) and BTPs (+10%) topping our performance ranking chart and returning about twice as much as the S&P 500 (+6%). EM equities have also done surprisingly well this year with a +8% gain to date. The latest July performance in China has also bumped both the Shanghai Composite (+7%) and the Hang Seng (+9%) into our top 10 list. Core DM rates are still in positive territory, though not surprisingly with Bunds (+6%) outpacing Treasuries (+3%). On the other end of the spectrum, the Nikkei (-3%) remains a key laggard while Russia (-5%) is feeling the heat from the ongoing geopolitical volatility. Generally commodities are amongst the worst performers this year largely led by softs.

Visually, the month of July

And YTD:

Aluminium to swing to deficit in 2015 after output cuts, ban

* Strong demand seen from U.S. auto industry

* Stock overhang expected to weigh on prices

* Premiums remain at record highs around $450/T duty-paid

LONDON, July 31 (Reuters) - The aluminium market outside China is set to record its first deficit in nine years in 2015 following production cuts and an Indonesian ore export ban, a turning point that could be the start of a prolonged shortfall as demand recovers.

After years of chronic oversupply, the market is beginning to tighten as producers cut production to battle rising costs, Indonesia bans bauxite ore exports and demand for aluminium rises, particularly from U.S. auto makers.

Analysts say the market could remain in deficit beyond 2015 but that historically high global aluminium inventories are likely to prevent much of a rise in prices.

The consensus forecast in a July Reuters poll was for a 444,000 tonne deficit in 2015, which would be the first market deficit since 2006, according to Thomson Reuters GFMS. 

"This is a market in massive structural surplus, though the physical market has moved into deficit," said Stephen Briggs, senior metals strategist at BNP Paribas.

"The deficit could be quite prolonged, but it needs to be. There's an awful lot of hidden inventory, not just in China but in the West, in financing deals and in warehouses."

Estimates of aluminium inventory outside China are at around 12 million tonnes. In LME-registered warehouses alone, stocks amount to nearly 5 million tonnes, although they have fallen by around 9 percent since the beginning of the year.

In China, the market is still in surplus, but that is expected to shrink due to the closure of some 2 million tonnes of aluminium capacity at high-cost smelters.

Outside China, producers have cut back as low prices and high costs erode margins. Daily average aluminium output fell to 67,000 tonnes in June from 67,500 tonnes in May, according to the latest data from the International Aluminium Institute.

Highlighting reduced output, Russia's United Company Rusal <0486.HK>, the world's largest producer, said in May its first-quarter primary aluminium production declined by 2.3 percent. 

Benchmark London Metal Exchange (LME) aluminium prices hit a 17-month high of $2,054.75 a tonne last week and have gained nearly 12 percent in the year to date. But the metal is still down around 30 percent from a May 2011 peak of almost $3,000.

"We think an all-in price of around $2,500/T will be needed to incentivise restarts of high-cost smelters in Europe and Brazil, and thus current curtailed capacity of around 1 million tonnes per annum there is unlikely to come back anytime soon," Macquarie analysts said in a note.

In contrast to cutbacks in the West, smelters in the Middle East and India are expected to ramp up production, in a move that could help ease some of the tightness in the market.

The United Arab Emirate's Emirates Aluminium is expected to add production of 449,000 tonnes this year and the Saudi Arabian Mining Co <1211.SE> 330,000 tonnes, according to Macquarie.

STRONG SHAPE

A major factor driving the deficit view is a bullish outlook for the demand, particularly from the automobile industry as it moves to produce lighter, more energy-efficient vehicles.

Ford Motor plans to launch a new aluminium-intensive truck this year, and aluminium firms have announced plans to build plants to fabricate sheet for automakers, whose names have mostly not been disclosed.

"In the automotive sector you see a clear advantage for light metal," said Svein Richard Brandtzaeg, chief executive of aluminium producer Norsk Hydro , adding that the aluminium market was in its strongest shape since 2008/09.

"There are new efficiency rules in the U.S market and EU regulation on carbon emissions. We see that U.S. (demand) is growing faster than Europe."

European aluminium traders said they are seeing a rise in enquiries for material at a time of year that is usually quiet as the western hemisphere traditionally winds down for summer.

The stronger demand, combined with restricted access to the metal, has helped keep European aluminium premiums, or costs to obtain physical metal, at record highs of around $450 a tonne for duty-paid material.

Financing deals and logjams in accessing metal from LME-registered warehouses have helped underpin premiums, with wait times to get metal backlogged by two years at warehouses in the Dutch port of Vlissingen, which holds more than 2 million tonnes.

"The rise in premiums has helped the all-in price improve from the first to second quarter. That's a big plus to the producers," an aluminium trader said.

"There's scope for premiums to rise. Material is still stuck in queues, and demand is pretty strong at the moment."

USD-INR Breakout

USD-INR Breakout, Resistance at 61.02, 61.52, 61.80, 62.50. Support 60.50, 60.70.