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Read all parts of this special series:
Why is Silver Falling?
Part I, Part II, Part III (not yet released)
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Gold and silver are traditionally considered to be a hedge against bad economic times. Put another way, precious metals go up when the economy goes down – or so says the conventional wisdom. That's why many investors conclude that gold and silver are the investments to own during economic contractions.
But, as it’s often the case with various bits of conventional economic wisdom, this one also begins to show cracks the moment you look at some historic charts.
Bob Prechter, Elliott Wave International’s founder and CEO, has done just that – several times, in fact, over the past 4-5 years. His conclusion? “Silver is an industrial metal [that] leads changes in the economy.” (September 2007 Elliott Wave Theorist.)
In other words: instead of silver going down in a good economy and up in a bad one, it does precisely the opposite. What’s more, silver “leads changes in the economy.”
“This behavior is counter-intuitive and counter to all the reasons for rise offered by silver enthusiasts, but it’s nevertheless,” adds Prechter. “Its ups and downs… correlate more closely with the stock market and the economy than with rates of dollar inflation.”
“If you follow the precious metals really closely, I can’t recommend our Metals Specialty Service more highly. Editor Mike Drakulich perceived the bullish implications of these markets before I did." – (Prechter, December 2005 Elliott Wave Theorist.)
How can silver enthusiasts be so wrong about the metal? We are not trying to explain their behavior; we simply state the facts. Take a look for yourself at this chart from Prechter’s June 2004 5? Elliott Wave Theorist:
“[This graph] shows that silver has been acting as an industrial metal, rising and falling with the stock market and the economy. … This correlation is exactly the opposite of the one that the majority of economic bears are relying on to project soaring silver prices.” – Bob Prechter, June 2004 Elliott Wave Theorist.
Since March 2008, silver (and gold) prices have tumbled, hitting the recent low of $10.23 an ounce. Few analysts could have imagined that move in the current economic climate – but our own Mn-Wd-Fri Short Term Update did. The STU was on top of the decline with precise silver Elliott forecasts all along. Here’s what turned the STU bearish:
“…waves are waves, and gold’s complete five-wave rally from August 1999 to March of this year indicated that it was time for a large decline – which was… the reason for our bearish stance.”
In the past few days, however, gold and silver have rebounded strongly – and, inevitably, analysts are attributing it to investors’ seeking “haven after Lehman bankruptcy.” (Bloomberg) It’s a very tempting explanation, yet that’s not why gold and silver have rallied.
Here again is a Short Term Update forecast, published in the September 12 issue – 3 days before Lehman bankruptcy was announced:
"Yesterday’s drop to $10.23 in [Silver] generated a Daily Sentiment Index reading of just 5% silver bulls. The 52% drop in prices over the past 6 months has finally engendered a deep pessimism, which suggests that silver is nearing a low. Therefore, the next move should be a rally that retraces to at least the extreme of the previous fourth wave…"
What can we learn from all this? One, that silver’s long-term trends rise and fall with the economy. And two, that Elliott wave patterns in silver charts can warn you of the short-term moves before they happen.