By Eric Fry

09/15/11 Laguna Beach, California – The International Can-Kicking Team is busy again today, as the European Central Bank, US Federal Reserve and three other central banks linked arms to kick the European debt crisis down the road until the end of the year.

Specifically, the Can-Kickers announced that they would provide three-month US dollar loans to European banks to insure that the banks have enough liquidity to make it to the end of the year.

If past scams of this nature are any guide, the “short-term” assistance will somehow morph into long-term or permanent assistance, funded by taxpayers. The markets are rallying because this scam “sends a powerful message,” according to one financial news source.

Message received: When all else fails, launch a massive bailout.

The markets will probably continue rallying a while longer, and the gold price will probably continue to retreat (just as Bill Bonner has been predicating). But the longer these counter-trend moves proceed — i.e. stocks up, gold down — the better the opportunities for forward-looking investors to re-weight their portfolios.

The recent selloff in gold, for example, is providing a glittering opportunity to add a little more weight to the precious metal sector. And as we mentioned in yesterday’s edition of The Daily Reckoning, gold stocks, rather than gold itself, seem particularly compelling at the moment.

Following up on this theme, we present the nearby chart for your consideration. First, the conclusion: Gold stocks are as cheap as they have been in a decade. Now the details: The chart below shows the price-to-EBITDA ratio of the XAU Index of stocks, both in absolute terms and in comparison to the price-to-EBITDA ratio of the S&P 500 Index. This ratio is a measure of price-to-cash-flow and tends to illustrate valuation more accurately than the more familiar price-to-earnings (PE) ratio.

In absolute terms the price-to-EBITDA of the XAU Index is currently around 7.5 times, which is only about 10% higher than the price-to-EBITDA of the S&P 500 Index. Both of these metrics are as low as they have been in a decade.

Obviously, however, “cheap” does not mean “buy.” Cheap stocks have a tendency to get cheaper, on the way to becoming way-too-cheap. Gold stocks are cheap, but they could still fall to way-too-cheap. Silver stocks, on the other hand, may already be way-too-cheap.

A Daily Reckoning reader named Kyle Sorgel makes the argument:

Within the precious metals sector, silver mining stocks may be the very best bet…

A consensus estimate of the total amount of silver mined from 3000 BC to now is about 44.4 billion ounces and for gold is about 4.25 billion ounces. This yields a gold-to-silver ratio of about 10.44, a far cry from the current gold-to-silver ratio of 45. In modern times, mines are pulling less silver out of the ground, relative to gold, than they did in ancient times. Total annual mine production of silver is only 8.6 times greater than total gold production. Furthermore, and most importantly, 53% of the total silver demand is used in industrial processes versus gold’s 11%. This means that every year 53% of the total supply of silver is USED UP, meaning it’s gone, vanished, disappeared.

Silver is an extremely versatile metal and as time has progressed science has found multiple uses in which silver provides a benefit that no other metal can provide (even gold). And since the silver is used in such trace amounts, most of it can’t be recovered.

Based on these facts, it seems inevitable that the large price disparity between gold and silver should narrow over time.

Mr. Sorgel’s argument is compelling. But please remember, dear reader, inevitable is not the same thing as imminent.

Eric Fry
for The Daily Reckoning

Read more: Awaiting the Inevitable Correction in the Silver Price http://dailyreckoning.com/awaiting-the-inevitable-correction-in-the-silver-price/#ixzz1YECbIoib

I find that cup and handle patterns tend to form after very strong moves that reach a significant overbought status. An overbought market needs time to correct and the cup and handle pattern is more of a consolidation than a correction. There is an initial correction and then the market gradually forms a bottom and slowly works its way back to the previous high.

We show Silver below. Silver had a very strong move up to nearly $50. It corrected to the $30s immediately and then spent three months ranging from $33 to $41. After confirming its the bottom, Silver has quietly worked its way beyond resistance at $40-$41. Given the new uptrend and the strength in Gold, its quite reasonable to assume Silver returns to $49. Should Silver form a cup and handle pattern, then once it surpasses $50, we can project a strong target of $65.

Naturally, the silver stocks have formed a similar pattern. Below is a chart of our junior silver index. Note that the average market cap is $600 Million. We created this index two years ago when these companies were juniors. Since then a handful have graduated from junior status. Anyway we can see that the index has a high of 310 and recent low of 215. This means a potential cup and handle pattern projects to 405.

Sure, the gold equities are breaking out as we touched on last week but don’t forget Silver and the silver equities. In our premium service we’ve focused on the leading and best performing gold equities while maintaining positions in the strongest silver stocks. Those equities are nearing their previous highs and forthcoming consolidation (handle) would serve as an excellent buying opportunity prior to an explosive breakout. If you’d be interested in professional guidance in riding this bull move then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

Opportunities abound in small- and mid-cap silver companies, according to Sprott Inc. Chairman Eric Sprott. In this exclusive interview with The Gold Report, Eric Sprott and Sprott Money Ltd. President Larisa Sprott say the fundamentals that drive the price of silver are as strong now as before the spring selloff—maybe even stronger—even though volatility is causing buyers to hold back a bit.

The Gold Report: The Greek economy is making headlines again, with the Greek Parliament recently voting in extreme austerity measures that include budget cuts of $40B plus a selloff of $72B in assets. When we spoke in March, Eric, you were quite worried about collapses in Greece, Ireland and Iceland. Do you see these new austerity measures as another step toward collapse, or do they signal a reprieve?

Eric Sprott: It’s the European troika advancing the money that’s really preventing the collapse, from the financial market point of view. The austerity program will create a collapse in Greece economically, but it at least gives them the opportunity to get the troika bailout. I refer to the troika as the ECB (European Central Bank), the IMF (International Monetary Fund) and maybe the BIS (Bank for International Settlements).

I think Greece is not much different from others that have gone before, whether Iceland or Ireland. Most governments in the world have taken on added monetary and fiscal responsibilities because of the financial collapse. For example, the U.S. wouldn’t be running a $1.5T deficit had there not been the collapse in 2008 because we wouldn’t have had the programs that we now have, trying to support the banking system that everyone thinks is too big to fail.

For quite a long time, my view has been that the banking system has been over-levered. The assets on the books aren’t worth what they would be in a normal monetary environment, and if they had to sell the assets, most banks in that situation would become insolvent. Who would you sell those assets to?

Imagine a Greek bank knocking on the door of any other bank in the world saying that they have Greek mortgages, loans to Greek companies and Greek bonds they’d like to sell. There’s no buyer, so the government basically has to step in, as happened in Ireland, Iceland, the U.K., the U.S. and Japan. It’s happened in almost every country, where the governments have come in to bail out the financial system.

This country with all of 11M people—as many people as live in Ontario—has almost taken down the whole system, as Lehman Brothers almost took down the whole system. What was Lehman? It was like a pimple, and on a relative scale, Greece is not a big situation either. But they want to prevent the falling of the first domino, because if the first one goes down, I can assure you what will happen. That’s what everyone’s guarding against. It would just spread amongst various banking systems.

TGR: Is there a possibility that Greece and other countries with debt issues could negotiate for pennies on the dollar to reduce their debts by 20%, 40%, or whatever? It would have an impact, of course, but not as bad as a default.

ES: That would be defined as a default for all intents and purposes. Some rating agencies have suggested that the voluntary rollover they’re talking about might still be officially a default because everyone knows that what they’re getting for what they’re giving up isn’t worth 100 cents on the dollar.

If a new party comes to power in Greece, they might say they’re going to rip up that agreement and take the default because Greece might be better off defaulting. Of course, the powers-that-be don’t want that. It’s as much the troika that doesn’t want it as the government in Greece. They’re all trying to prevent this contagion from starting.

TGR: But you’re suggesting that eventually the contagion will take hold.

ES: It’s kind of taken hold already, right? The weakest—Iceland and Ireland—have been knocked off already. Greece was the third weakest. Who knows where we go from here?

TGR: When we had our conversation in March, you said that sooner or later people will realize that it’s better to have real assets in physical metals than bank accounts.

ES: I’ve always believed that, and it’s even truer today. Would you rather have your money in a Greek bank or in gold? Would you rather have your money in an Egyptian, Irish or Icelandic bank or gold? Iceland took a devaluation; if the people in Iceland had their money in gold, they wouldn’t have lost a damn thing.

You also take a currency risk when you own a bank deposit. Even a U.S. resident who owns gold instead of a bank deposit would be better off, because the purchasing power of the dollar is going down on an international basis.

TGR: That’s why you called gold the investment of the last decade.

ES: Right.

TGR: And you’ve called this the decade of silver, saying that on the basis of the historical gold-to-silver ratio, silver may even triple the performance of gold. Do you still believe there’s the potential for outperformance at that level? And, if so, over what timeframe?

ES: It’s very difficult to pick timeframes, because so many events can transpire, but I really believe that silver will trade at a 16:1 ratio to gold. I certainly believe that gold can get to $1,600/oz. this year, and while I’m not suggesting that silver will make it to $100/oz. this year, it’ll certainly trade at a 16:1 ratio to gold within three to five years. By then, who knows? Gold could be at $2,500/oz.

TGR: The gold price has been climbing neatly along the 200-day moving average, while the silver price has been all over the place. Do you foresee a time where metals just go hyperbolic?

ES: Yes, I think that will happen. When people ask when I’d get off the gold train, I say that it would cause me to reconsider things if governments and central banks appeared to be getting responsible. I’d say if it evolved into a mania ala NASDAQ 2000, you might decide to exit the investment. Of course, if they made gold the official reserve currency, I wouldn’t need to own it anymore because I could convert my currency to gold or silver at any time.

So, it’s hard to define when it’s going to happen. Earlier this year, I was totally convinced that silver would easily make $50/oz., and for all intents and purposes, it has. I think silver will rally pretty powerfully from this little selloff we’ve had, and hit a new high this year.

TGR: Larisa, has Sprott Money seen a corresponding increase in silver to gold this year?

Larisa Sprott: When we last spoke in March, in terms of dollars, silver was outselling gold by a ratio of about 5:1—we were selling five times more dollars of silver than dollars of gold. The silver market has had a price correction and it’s been a volatile commodity over the last month or so. I’ve seen a rather dramatic shift in sales toward gold. In terms of dollars, gold is now outselling silver on a 3:1 ratio.

It’s not that people have lost their taste for silver, but they’re holding back on purchasing silver because of the increased volatility in the market. I think that once the silver price demonstrates less volatility, our sales will return to the aforementioned ratios.

TGR: Do people still tend to take possession of their purchases, or are more keeping it in your storage depository?

LS: They’re taking possession simply because at this time we only offer storage in the United States. Some of our U.S. clients fear that a 1933-type confiscation scenario will happen again, so they would prefer to store in Canada or internationally. I’ve even seen people drive from places such as Florida and Washington to take possession of their bullion so that they may store it in a safety deposit box in Canada.

We’re opening a storage depository in Canada, but that’s still three to six months out. I’ve had a lot of interest from clients who say that as soon as that facility opens they’ll be moving their bullion up here.

TGR: What else is new at Sprott Money?

LS: We are working on increasing our U.S. presence. We anticipate opening our New York office by October of this year. We are also minting a Sprott silver bar and coin set to be ready for sale in early 2012. And as a proud supporter of GATA (Gold Anti-Trust Action), I am pleased to announce that we will be selling the GATA gold coin at their upcoming conference in London this August.

TGR: We’ve seen that Sprott Money is the major sponsor of the GATA Gold Rush 2011 conference coming up in London in August. How did your organization get interested in GATA and what it has to say?

ES: When I started investigating an investment in gold and silver in 2000, among the most outspoken—to whom I’m ever so thankful—were the GATA people, who suggested that central banks, in a somewhat coordinated fashion, were suppressing the gold price. There seemed to be some compelling evidence for that because central bankers were huge sellers of gold, which retrospectively looks like the dumbest thing they could ever have done. With 20/20 hindsight, that decision looks like one of the greatest knucklehead moves of all time. Here we are 10 years later and where they were sellers of 400 tons of gold a year, now they’re buyers of 400 tons of gold.

GATA was prepared to challenge the system and to explore the data behind various government moves, why they did it and why they always advertised that they were selling gold, which almost necessitated getting the worst price possible instead of the best price. The whole attitude they were taking to gold seemed ridiculous.

The GATA people have been a big influence on the increasing interest in gold. They’ve been incredibly helpful in terms of keeping people focused on what’s going on in the precious metals markets. They had a wonderful conference in Dawson City in 2005.

The people who spoke there—and who will speak at this GATA conference in London—are all independent thinkers who aren’t swayed by the conventional. They’re typically contrarian. You have to work hard to be a contrarian, because you have to win what would seem to be very difficult arguments. They’re just top-notch people. When I look back over the last decade, I think those who were skeptical and outspoken are the true heroes.

If more people had listened to them, they wouldn’t have suffered the kind of financial damage that has transpired in the last decade. Certainly, if they owned gold and silver in lieu of any other investment, they would’ve been better off.

TGR: You noted that when the central banks started selling gold about a decade ago, they pretty much locked in the worst possible price by announcing their intentions ahead of time. Is it the same now that they’re announcing in advance their buying intentions?

ES: They only announce after they’ve bought. For example, in either 2008 or 2009, the Chinese Central Bank revealed that it had purchased 400 tons of gold over about four years, but that was well after the fact. Obviously those purchases were an active force in the market. China hasn’t announced anything in the last three or four years, but I suspect it’s been a buyer all this time. The Central Bank of Mexico recently announced buying 93 tons, which undoubtedly concluded its purchasing program.

There probably should be transparency in these transactions anyway. The central banks should be telling the populations they represent where they are investing their money.

TGR: You’ve indicated that GATA was founded on evidence of collusion among financial institutions that resulted in suppressing the gold price. We also hear about market manipulation through derivatives. Tell us a little bit about this.

ES: First, understand that commodity markets rarely settle in physical commodities; they’re really paper markets. Let me give you an example.

We produce 900 Moz. (million ounces) of silver in a year. When silver was up around $48/oz., between the London Bullion Market Association (LBMA), the COMEX, the SLV Silver Trust and some vehicles in China, we were trading 1 Boz. (billion ounces)/day silver in the paper market. We produce just a little over 1 Moz./day for consumption as an investment. So we trade 1 Boz. of paper silver and yet there’s only 1 Moz. of physical quantity available for investment. That makes you wonder.

They get after the silver speculators who are long. I can understand being long silver, because maybe those speculators think they’d like to own it. What are those who are selling the billion ounces thinking when there’s no physical silver to settle with?

TGR: What might change to slow this down?

ES: There should be position limits, and trading limits per day. What’s the net effect of trading 1 Boz. when the stuff doesn’t even exist on the face of the earth? The short position in the silver market was so concentrated amongst the four largest bank-owned firms that it was shocking. Why they should be short that much silver is beyond me.

TGR: Let’s talk a little about options for the individual investors.

ES: I’m very comfortable having a very large weighting in precious metals, which are way more likely to hold their value than paper assets. And I feel so involved in trying to get people to own more precious metals because I think it’s the one thing that will save them in a very difficult financial time. But most won’t take the steps of getting a little bit of insurance by owning precious metals.

TGR: If another financial trauma is coming, should investors be more weighted with the actual physical metals or should they continue with the equities too?

ES: People worry about the banking system, and I think ultimately they’ll put their money into gold and silver. If the prices of gold and silver go up because of that, notwithstanding a short-term decline in the market, ultimately people also will realize that gold and silver stocks are good things to invest in. But you may have to go through a six-month swoon.

We went through a swoon like that in 2008. Gold was probably $900 at the time. Owning gold and silver would’ve been very propitious. Today it’s $1,500. I think this next time around, as we see gold and silver gaining more recognition as to their intrinsic merits, that will get transmitted into the gold and silver shares.

TGR: As you look forward, are you holding or considering some equities that you feel will swoon less than the market?

ES: Let’s face it—if you use the HUI Index, precious metal stocks have gone up by a factor of about 12 to 13 times from the 2000 bottom. On a long-run basis, there aren’t many losers in those stocks, and certainly on a relative basis, they’re all winners.

Until a few months ago, any silver stock on the board had such a massive run that everybody could sell at a profit. It’s important to know that most people like to sell their winners. At the first sign of problems, you sell the stock that’s got the biggest profit for you. And, it’s very easy to sell it. Maybe it’s not so easy to sell some bank stock that’s still 60% from its high, but it’s not too tough to sell a gold and silver stock that’s 5% from its high because it has had a good run.

We get more volatility in this group because of that. Any stock that has gone up a lot will be more volatile than one that hasn’t. That’s just the way it is. The high flyers always get knocked down the most, because they’re easy to sell. That’s the situation we find ourselves in. Most of these stocks have been the best performers of the last decade.

Every time there’s a little hiccup in the market, people sell them. It doesn’t mean that the fundamentals have changed. That’s just the way people react in a market selloff. Give it time. People will get calm again about where they should have their money.

TGR: We were talking with Rick Rule and Brent Cook a couple of weeks ago about the fact that most juniors are off 10%–20% since April and May. They suggested it might be a good time to own some mid-caps and seniors. Considering the profit-taking you just described, do you agree?

ES: I’ve been investing in small-cap stocks for roughly 40 years, and the opportunities in small caps are far superior to those in big-cap stocks on a sustainable basis. It’s always been the case because they’re under-owned, under-followed and under-capitalized. You can do a lot in the small- to mid-cap area that you can’t do in the large-cap area. You can buy a junior gold stock on a relative valuation of probably a third of any major stock just because they’re seasoned and that’s where the big money goes. Opportunities abound in the small- to mid-cap area, so that’s where I’m going to stay. In a sustainable rally, I guarantee you they’ll outperform the large caps.

TGR: Peru is one of the best mining addresses on the planet, but we’ve seen a lot of decrease in share prices in some of the Peruvian mining equities. You have some interests there, too, that have been specifically affected by government action. Could you comment on that?

ES: Bear Creek Mining Corp. (TSX.V:BCM) has been one of my favorites because of its two ore bodies. It’s unfortunate the governments have made the decisions they’ve made. We see this in different places, not just in the less-developed countries, where governments come in and change the rules. If it’s not Ecuador, it’s Peru. If it’s not Peru, it’s Bolivia. Somebody’s always doing something.

TGR: In the case of Peru, though, this was an injunction signed by outgoing President Alan Garcia that halted Bear Creek’s Santa Ana silver project specifically.

ES: You take those risks with any country. People always ask if I think the U.S. government will confiscate gold. You hear chatter about the U.S. government nationalizing the gold mines someday. If you want egregiousness, that’s almost as bad as Ollanta Humala (Peru’s new president) declaring that one property is not going to continue to be owned by somebody. It could happen anywhere. That’s one of the problems you face when you’re an investor; you don’t know exactly what the political flavor is.

If I were a betting man, I’d bet the Santa Ana mine comes into production within the next 10 years. The stock market doesn’t like delays, but they don’t detract from the merits of the property. When people calm down and know the regulation is in place to try to prevent environmental problems, it will ultimately get the go-ahead.

TGR: Do you feel just as bullish on small caps in gold as you do in silver?

ES: Because I think the price of silver probably will outperform gold by maybe 2.5 times, I have to look much harder for silver equities than gold equities. That’s what we’ve done in the last 18 months. So I prefer silver junior equities to gold for sure.

When I look at the demand and supply fundamentals, it’s all in place as far as I’m concerned. Lots of times the market doesn’t corroborate your view for a while, but the important thing is the market corroborates your view along the way. Yes, we had to deal with that gut-wrenching selloff in the gold stocks in 2008, but when you look back at it now you wonder what the hell the market was thinking.

TGR: What are some of the good silver small caps you found in your search?

ES: We’ve been in lots of companies. We’ve been involved with Fortuna Silver Mines Inc. (TSX:FVI; Lima Exchange:FVI), First Majestic Silver Corp. (TSX:FR; NYSE:AG; Fkft:FMV), Argentex Mining Corp. (TSX.V:ATX; OTCBB:AGXM), SilverCrest Mines Inc. (TSX.V:SVL), Silver Quest Resources Ltd. (TSX.V:SQI), Aurcana Corp. (TSX.V:AUN) and Mirasol Resources Ltd. (TSX.V:MRZ). I’ve got a long list.

TGR: Those names have assets all over North America and South America.

ES: Most of them tend to be in North America, particularly Mexico, Central America and South America. But I own stocks in companies with silver in other places, too. One example is Minco Silver Corp. (TSX:MSV), which has its Fuwan silver deposit in China. I’ll buy a silver asset wherever it is located.

TGR: So clearly, you still do see this as silver’s time to shine.

ES: I do. And I’d refer readers who’d like to know about why I believe the robust fundamentals for silver are only getting stronger to the Caveat Venditor! article we’ve just posted to Markets at a Glance on our website.

TGR: We’ll be sure to check that out, too. Thank you both for your time.

Eric Sprott is chairman of Sprott Inc., CEO, CIO and senior portfolio manager of Sprott Asset Management LP and chairman of Sprott Money Ltd. He has more than 40 years’ experience in the investment industry. After earning his designation as a chartered accountant, he entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities. After establishing Sprott Asset Management Inc. as a separate entity in December 2001, Eric divested his entire ownership of Sprott Securities to its employees. Eric has been stunningly accurate in his predictions, including foreseeing the current financial crisis. He chronicled the dangers of excessive leverage and the bubbles the Fed was creating, while also correctly forecasting the tragic collapse of the housing and financial markets in 2008. Eric’s predictions on the state of the North American financial markets, as well as macroeconomic analyses have been presented in Markets at a Glance, a monthly investment strategy newsletter.

Larisa Sprott joined Sprott Money Ltd.(www.sprottmoney.com) in the role of President in December 2009. As one of Canada’s largest owners of gold and silver bullion, the company’s goal is to facilitate ownership of precious metals to the general public. Larisa has more than 15 years experience in the financial industry, having worked at Sprott Securities Inc. (now Cormark Securities), first as an office administrator in the Vancouver office, and later in roles in research and corporate finance at the Toronto headquarters. Larisa then spent five years with Sprott Asset Management in the capacity of client services, sales and marketing. In November 2007, she became an investment advisor responsible for servicing and managing high net worth clients.

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DISCLOSURE:
1) Karen Roche and Sally Lowder of The Gold Report conducted this interview. They personally and/or their families own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Fortuna Silver Mines Inc., SilverCrest Mines Inc.
3) Eric Sprott: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) Larisa Sprott: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

This week, the loquacious jackass will permit some lovely pictures to tell the story. Three graphs adequately tell of a grand opportunity to latch onto the powerful Gold Train with a super-charged Silver Scout. Who were the smart buyers back in September of 2007? The false phony deceptive mainstream message then was that the subprime mortgage problem was contained. That was the first major stumbling block by the hapless witless clueless USFed Chairman Bernanke. He has made not a single correct economic or financial system analytic call. Who were the smart buyers back in October of 2008? The false phony deceptive mainstream message then was that a TARP solution was being put in place to save the US banking system. The solution turned out to be basic largesse to the big US banks, enabling purchase of preferred shares, enabling outsized executive bonuses, and enabling secretive bailouts of banks across the globe. Without the Financial Accounting Standards Board allowance for insolvent banks to continue to dictate the value of their own balance sheets, otherwise known as systemic accounting fraud, the big US banks would have been liquidated. The entire Too Big To Fail principle is actually a battle cry to avoid solutions, to protect the banking elite that was mostly responsible for multiple $trillion bond fraud and mortgage fraud. Without any reservation, it can be said that TBTF means No Solution, no remedy, no recovery, and no attempt at anything remotely resembling a road to economic recovery. In my view, TBTF is the epitaph on the USEconomy and the nameplate on the USTreasury Bond default. So who were the dummies who ignored the opportunity to buy gold and especially silver in September 2007 and October 2008? The majority of them listened and trusted the mainstream news, the Wall Street misdirection, and all their fallacious messages.

THE COMMITMENT OF TRADERS SIGNAL

A big hat tip to internet contributor RG, whose message was relayed by the Midas Report. Consider verbatim his message, in which he gleefully proclaims to be calling all Rocketeers of the Happy Silver Ship. The goodfellow RG wrote, “The latest Commitment of Traders Report for silver is now screaming out at full volume BUY BUY BUY. In fact, the Commercial Short-Long Ratio that I have already bored you with at great length in recent correspondence is now down at a multi-year super extreme of 1.79. Below is an up-to-date chart of the COT picture. In summary there have only been four other weeks in this whole bull cycle where the ratio has dropped below 1.80, four weeks. The first two weeks of these was the 28th August 2007 and the following week of the 4th September 2007. The second tranche was the 21st October 2008 and the following week 28th October 2008. If you study below both the chart of silver over that period and also the HUI gold mining index, you can see how these extreme lows below 1.80 in the ratio coincided on both occasions very markedly with a bottom in both the silver price and the mining index. On each occasion this proved to be a multi-year opportunity to take positions in both the metal and the precious metal mining stocks. Each time the price of silver rose by some 60% to 90% within a six month period! And the HUI index rose some 90% to 160%. Folks, there is no such thing as a risk-free trade. There is no such thing as a free lunch. And there is no such thing as a one-way bet. However, there are certain times in an investment cycle when an outstanding opportunity presents itself and advantage should be taken. The evidence above shows very clearly the historic correlation between an extreme low below 1.80 on the Commercial Short-Long Ratio and a multi-month bottoming in the price of both silver and the precious metal mining stocks. I have been trading the precious metal sector since 2003 and I would consider this to be one of perhaps four of the most suitable buying opportunities within the last eight years!” The man RG makes a compelling argument, without providing the background factors that push the gold & silver prices upward. He simply points out the COT signal and the resulting performance after two significant lows were registered in precious metals prices. Very convincing inded. Thanks to RG also for the fine chart.

Note the green arrow in September 2007, a strong signal when silver was at a $12/oz price. Note the green arrow in October 2008, a strong signal when silver was just above the $9/oz price. The same type of signal is identified with yet another strong signal here & now in July 2011 with silver price at $35-36/oz. It is ready for the next big upleg. This time gold might lead, but as usual silver will follow and run fast and hard making yet more breathtaking gains. The great springtime consolidation is over. The power merchants have spent their ammunition with no lasting reversals, only pause with consolidation. They must manage unending financial crisis without motive toward remedy or solution. The climb has begun. Eager investors have waited and will wait no longer. The Chinese have already begun to re-enter the gold & silver markets armed and loaded with a $3 trillion war chest. Hong Kong exchanges await the precious metals trade. Lawsuits against the tainted SLV and GLD funds are in progress. A little more backfilling might be required. The fundamentals are incredibly powerful and bullish for both precious metals. The global monetary and sovereign debt situation is in ruins, crumbling more with each passing month. If corrupt henchmen are not in charge, then clowns and charlatans are at the USGovt, its finance ministries, the USFed itself, the many regulatory bodies, and so much more.

PAST SIGNAL PERFORMANCE

Consider the silver price move from the two points in the past. The move up by 50% in six months to March 2008 was interrupted by the Wall Street meltdown, followed by the insolvent collapse of the US banking system. Those who bought all the way down from $20 to the bargain price of $9.5 were amply rewarded. The key was to avoid leverage, paper contracts, and the mainstream nonsense spouted daily with errant focus and deceptive view. The sudden banking system insolvency in 2008 was followed by grand orchestrated attacks on the entire anti-USDollar trade. Hardly a hedge fund was not attacked by their own creditors and brokers on Wall Street, incredibly desperate to stay afloat. They found relief in white pixie dust. The US banks collapsed but did not suffer failure. Instead, with FASB aid, coupled with TARP confiscated funds, they continue to limp along as Grand Zombies. The silver price gain since October 2008 has been on the order of 4-fold, almost 300%. This is a stunning gain. The same will be said when silver surpasses the $100 price level. The ruin of major currencies in falsely posed money forms, the parade of USGovt debt, the hapless unfixable condition of the USEconomy, the submerged US households, and the US banks suffering from shadow home inventory coupled with investor lawsuit marred by defiant default in legal challenge, these over-arching factors assure much greater ruin of money. They assure a march to $100 silver. Many naysayers will be silent a year from now.

Ditto for the gold price moves, but the size of the gains are much less. The shape of the chart is very similar though. The springtime correction was not as great, but the gold gain was only half the silver gain. The crumbling global monetary system is the primary push factor for gold, not price inflation. The quality and substance of money is under scrutiny and question. In the next year or more, the price inflation factor will be put more in the forefront. Investors and households will be forced to seek out true inflation hedges, if not hedges against personal ruin.

FACTORS IN VIEW & ON HORIZON

The future holds many crucial factors to be extremely important. The Greek Govt debt bandaid will prove again to be pathetic and useless, buying a little time, while it aids the big European banks in toxic asset redemption. The bag holder is the Euro Central Bank, going down the tubes with its outsized Southern European sovereign debt and deep losses. The debt contagion will spread to Portugal next, then Spain and Italy. Those two large nations, spared the shame and focus up until now, will deliver two lethal deadly blows in the near future. When these two large columns fall on the European bank offices, the Germans will finally announce their exit plan. The Euro Central Bank just hiked interest rates by 25 basis points to 1.5% in defiance of the USFed. My Jackass forecast made in early 2009 was that the USFed would be dead last in hiking rates, and that call seems correct. The big US banks have troubles in court. They actually believe a mere $8.5 billion can permit them to walk away from well over $1 trillion in bond fraud. They want bond fraud and mortgage contract fraud forgiveness with limits on restitution and penalties. Their executives in New York City and London still enjoy $200 lunches. Not a single settlement deal will stick, not when investors and individuals are winning every single court challenge against the banks. The municipal bond and auction bond fraud deals will follow. The budget battle within the chambers of the USGovt has exposed the polarization, corruption, ineptitude, lack of leadership, and inability to avoid the catastrophe. It is simply too broken to fix. Taxes cannot be raised due to economic fragility. Entitlements cannot be cut due to public outcry and dependence. War cannot end since too profitable to the syndicate. Deficits will pile up regardless of any accords. Whatever progress is made will serve as tiny down payment for a bigger problem just a few months ahead. The next news item to anticipate is flirtation with USTreasury auction failures, against a backdrop of absconded USGovt worker pension funds. It is no wonder Treasury Secy Geithner wants to leave town. The next QE initiative will come in response to an auction failure, as buyers have vanished and primary bond dealers are under extreme distress. The lousy auctions last week were the telling indicator, largely ignored by the blind in the madding crowds. The US states are falling like flies in the summer heat, trapped inside window frames. Their extraordinary measures to avoid default have become almost a tragic comedy. Talk has come of splitting California into two states, of silicon and latin stripes. Illinois and New Jersey are basket cases. Wisconsin is a war zone.

The USEconomy sputters down the hill over the cliff with lost brake systems and no functioning engine. The industrial base has been forfeited in its core. Legitimate income was replaced by debt which defaulted. Then lastly consider the assault on global crude oil supply, the silly futile release from strategic petroleum reserves, following the Gulf of Mexico shutdown. The elite want $150 crude oil. The oil release effect has been forgotten already in just two weeks. With all the positive factors toward gold & silver, by the middle of next year in 2012, one must wonder what motivated people not to invest in precious metals after seeing the strong COT signal once more. The smart ones among us have learned long ago to ignore the Wall Street sell side artisans, to ignore the USGovt wrecking ball managers, to ignore the equity stock analysts whose paper game has turned into a leveraged valuation bonfire. Money faces ruin, as Gold & Silver offer preservation and growth during the greatest transfer of wealth in over a century. Recall the barons who exploited the Great Depression, whose names are part of the elite landscape of banking and politics and philanthropy.

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Use the above link to subscribe to the paid research reports, which include coverage of critically important factors at work during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Successful market timing is based on careful use of technical analysis and sentiment analysis. Technical analysis measures supply and demand and sentiment analysis takes that a step further by looking at investor attitudes their positions and money flows. This information helps us assess probabilities. Nothing is certain but we want to see strong evidence before forecasting a turn in the market. In regards to Silver, we see strong evidence that a bottom is in place and the market will move higher in both the short and intermediate term.

Below is a chart from timingcharts.com which shows Silver, the commercial short position in Silver and open interest. After Tuesday it appears the market has put in a bottom (based on daily closing prices) at $33. More importantly, the commercial short position is at its lowest level since April 2009. Open interest is 29% off its high and at more than a one-year low. This tells us that the market is presently devoid of speculation.

Meanwhile, as of the end of last week, public opinion (from Sentimentrader.com) in Silver was only 32% bulls. That is a three-year low.

It has been said the stocks should lead the commodity at key turning points. Several months back we were harping on the relative weakness in silver stocks. Now that has completely reversed. The silver stocks have been leading the metal for the past two weeks. In fact, our junior index closed at its highest level since June 1. Silver would have to close above $38 to reach its highest close since June 1.

As Silver hit $50/oz, we wrote a piece titled Downside Targets for Silver. We concluded with: “…wouldn’t you rather increase your positions in the $30s rather than at $45 or $50?” Well, now is your chance. Back then, public opinion was over 90% bulls and Silver was in a parabolic state. Today, we see that Silver has advanced to $35 after failing to close below $33 over the past two months. Furthermore, sentiment analysis is as supportive for Silver as any time in the past few years. Finally, the stocks, which tend to lead at key turning points have closed at a five-week high.

We don’t make predictions, we only assess probabilities based on our evidence. The evidence is compelling that the silver complex has put in a bottom. We believed so two weeks ago and that is why we increased positions in our premium service. If you are looking for more analysis and professional guidance, then we invite you to learn about our premium service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

Mark,

Like most things, you’re reading my ‘handwritten’ computer notes. The capitulation zone can be best characterized as the point where those beating the grass (strong hands) are finding it difficult to locate snakes (weak hands) to scare.

The big flush since April illustrates repositioning within the secular trend. These setups tend to foreshadow acceleration compressions within the trend. That is, fairly fast doublings – i.e. shock and awe style moves.

Silver London P.M Fixed and the COT Futures and Options Open Interest Stochastic Weighted Average

Eric,

Could you please explain the ‘CAPITULATION ZONE (and anything else you could offer on the ‘SHOCK N AWE’ move potentially occurring in silver).

Many thanks. I know NO ONE who called the first move. Many mining execs I chat with say they NEVER saw it coming.

All the best,

Mark

PS: Love the BATMAN reference. Huge Adam West fan. He was classic playing himself in a KINGS OF QUEENS episode.

Post Source

Chart courtesy stockcharts.com

Chart courtesy stockcharts.com

On May 17th, we bought shares of GDXJ at a price of $34.05.
On May 18th, we sold these shares at a price of $35.45, realizing a net profit of 4% in less than 24 hours.
On May 20th, we bought again at a price of $34.91, and sold them 3 hours later at a price of $36.20, realizing a net profit of 3.5% in just 3 hours.
On May 23rd, we bought again at a price of $35.0591, and sold them on may 24th at a price of $36.20, realizing a net profit of 3.10% in less than 24 hours.

Interested in similar trades and updates? Sign up now, and get instant access to all our services.

Credit the great work of sentimentrader.com, which is a fantastic service. The chart is below.

As you can see, both open interest and the speculative long position had been trending down. Both continued to decline during the parabolic move. When open interest falls but price rises, its a short squeeze. The same thing happened with Cotton just a few months earlier. I don’t place much time or emphasis on speculating about market manipulation or intervention but the COT tells us that the commercial traders (which includes JP Morgan) were covering. Typically, the commercials buy into weakness and sell/short into strength.

The low speculative long position is one reason why Silver looks healthy in terms of sentiment. Going forward Silver needs to define and establish support and then build a base before working its way higher. For more insights, analysis and guidance on Silver and Gold, consider a free 14-day trial to our service.

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com