This year, up to now, JP Morgan has hoarded as many as 20.4 million ounces of silver in its COMEX warehouse:
source: Simple Digressions
Interestingly, the JPM warehouse has been reporting higher silver stocks since 2015 (no matter at what price the silver was trading). If they continue hoarding silver at the same pace as in 1Q 2018, at the end of 2018 they would have had around 200 million ounces of silver (now there are 140 million ounces at JPM warehouse).
For better comparison, SLV, the world's largest private owner of silver bullion, holds 318 milion ounces of silver now (JPM Morgan also has its silver stake there).
Well, it is a lot of silver (global annual mine production is around 900 million ounces) so the question is:
Why are they doing it?
In my opinion, there is a good chance that precious metals will finally break above the latest cyclical tops established in July / August 2016.
However, to do it, gold has to be stronger than the US dollar using an absolute measure. Or, in other words, applying the concept of the goldollar index:
source: Simple Digressions
As the chart shows, most recently gold and the goldollar index have bounced off their strong resistance (two horizontal lines and blue arrows). In my opinion, a major breakout will be only valid when both instruments break above their resistance at the same time (more or less). It means that a prudent speculator should closely watch the way gold and the goldollar index perform.
As always, the devils is in the details but at this point the issue is quite simple. As long as gold and the goldollar index do not break together - be careful.
* - "Waiting for Godot" - a play by Samuel Beckett
In the long-term investing one has to keep in mind a typical sequence:
During economic expansion the first asset class to top are treasuries. Then the stocks are topping and, finally, commodities.
Look at the chart below:
source: Stockcharts.com
The chart shows this rule in practise. If I am correct, treasuries had topped in 2016 (blue circle). The stocks are probably topping now (the green circle), even despite the latest all-time high made by Nasdaq 100.
Finally, commodities, represented by the CRB index (unfortunately this index is overweighted by oil), are breaking above the long-term resistance level at 195 (the red circle).
Summarizing - if I am correct, now there is time for commodity investing...
It looks like we are ahead of a major breakout in precious metals. Look at the chart below:
source: Stockcharts.com
The chart shows a popular precious metals performance measure - a silver / gold ratio. As you surely know, gold and silver prices go in tandem but silver overperforms gold during a bull market and under-performs during a bear market in precious metals.
That is a theory. In practise, very often the ratio is a lagging indicator. For example, in the beginning of this bull market in gold (no, I am not kidding - in my opinion, we are still in a bull market in precious metals) the silver / gold ratio was going down (January - March 2016). Then it followed the rule and went up.
Interestingly, in July 2016 the ratio printed its cyclical top and since then it has been going down sending us a message that not everything was good with the precious metals market. And yes, since July 2016 gold was not able to break above the latest cyclical top at $1,350 - $1,375 per ounce.
These days the ratio is once again very close to its multi-year bottoms (red and blue circles on the lower panel of the chart). However, the latest bottoms (red circles) were established when gold prices were very close to their bottoms as well.
This time (the blue circles) the ratio is at one of its lowest levels but gold is not.
In my opinion, very soon the ratio should start another move up (if history repeats). It means that gold should follow the ratio but this time the move in gold should start from the current level ($1,330 an ounce).
If I am correct (and lucky), we should see a major breakout in gold (and silver ) prices soon.
Since the cyclical top in gold prices (July 2016), the silver / gold ratio has been steeply going down:
source: Stockcharts.com
Well, it is not a pattern the gold bugs are looking for. Generally, the silver / gold ratio and gold prices go in tandem - the opposite pattern supports a bearish thesis on precious metals. And since the last top in gold prices the pattern drawn by the silver / gold ratio was typical for a bear market or a consolidation phase in precious metals.
However, today we have the first sign of improvement - the silver / gold ratio is breaking above its resistance (the dotted red line on the chart below):
source: stooq.pl
On the other hand, the gold bulls should be cautious because gold is still below its strong long-term resistance of $1,350 - $1,375 per ounce. Most recently every time gold was close to this resistance its prices were bouncing off and...dropping. So, be cautious and patient...
The third issue of the Simple Digressions Newsletter has been dispatched. Please, find it enclosed in your e-mail boxes.
Please, note that I have added a new pick to the portfolio.
