The Big Silver Short

Silver Chartbook – How to weather the storm?

This article is a guest post by Florian Grummes of Midas Touch Consulting.

How to weather the storm?

With US elections coming closer the density of negative news has as well. Who to believe? How to weather the storm?

If everybody is talking about the worst most often nothing bad is happening. Nevertheless, it is essential to be prepared which results in being calm, the essential state necessary for market participation. Most look for a single, final solution. When it is about money and safety we as humans do not like situations in flux since we are apprehensive to change. This is why there are a lot of long-term investors who enriched themselves for many stretches in history, but we do not see this approach to be working out this time around. In principle, a large drawdown is the most unhealthy thing for any portfolio, based on the phenomenon that a 50% loss requires a 100% gain to just break even again. We see three main risks that should be avoided!

S&P 500, Monthly Chart, Short term:

S&P 500, monthly chart as of October 1st, 2020.

S&P 500, monthly chart as of October 1st, 2020

Short-term: COVID flaring up in the fall season alongside election volatility could be a trigger for a temporary market correction of a greater magnitude in percentage. Even though brief, a sharp price movement could be that severe that margin calls would drag down all asset classes severely. A time you want to be in cash and to repurchase precious metals and cryptocurrency at much lower levels.

The chart of the S&P500 above shows prices overbought. With price extensions in principle reversing from a deviation of the mean (grey dotted lines) by a likelihood of 95.4% for two standard deviations and even 99.7% at three standard deviations, we expect an extensive price decline.

Silver, Weekly Chart, Midterm:

Silver in US-Dollar, weekly chart as of October 1st, 2020.

Silver in US-Dollar, weekly chart as of October 1st, 2020

Midterm: Governments around the globe try to solve problems by printing more money. The result is a crack-up boom, meaning money supply trickles into all tranches and as such isn’t creating value. Inflation is the most likely scenario as a result. Your cash will lose dramatically on purchase power. This means you want to be more exposed to markets versus cash. Buying the dip from the short term scenario is the way to go.

The Silver chart above shows how the short-term scenario might cause temporarily even extreme dips. Don’t let this concern you on your physical holdings. It will be the precious metal sector and cryptocurrencies that will recover much faster than the rest of the market. The breakout of the multiyear range was a successful one due to its magnitude. As such price advances will be met with much less resistance on the next leg up!

Silver, Monthly Chart, Long Term, How to weather the storm?

Silver in US-Dollar, monthly chart as of October 1st, 2020.

Silver in US-Dollar, monthly chart as of October 1st, 2020

Long Term: We assume that by probability the highest likelihood is inflation finally transforming into hyperinflation. A scenario where you want no cash exposure. At that point, precious metals and Cryptocurrencies will be your best bet to weather the storm. Your efforts of having accumulated physical silver will not only be handsomely rewarded but you will have created a haven through wealth preservation.

The chart above tries to illustrate Silver price behavior over the long term when faith in the value of fiat currencies will have driven money into tangible assets like Silver. With its need in practical life on a day to day basis and the point, that Gold might feel too expensive for most, Silver might get into the spotlight as the cheap alternative.

How to weather the storm?

The core message here is to be prepared. Whatever makes you feel calm and comfortable is key here. Some like their cellar stacked with food and water. Others invest in their health with extra attention to their daily workout routines. For the markets, preparing for each possible scenario and to have a plan ready on how to participate is certainly a great way to not be surprised by more dramatic price actions. Keep calm and keep your powder dry. Be flexible and add to our views some you find likely. Maneuvering over the next months and years through more volatile markets with calm and an action plan might change a feeling of fear or uncertainty to one of opportunity.

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