If there is one single problem with investing and trading, it is extreme trading. There is no bigger rush than buying something that is rocketing or panic selling at a low. Starting April, silver was at a multi-year extreme. The adrenaline rush we get on flipping the top is like consuming a drug. This is why catching the top is a vocation in itself. The illusive always excites.
Silver was a top-ranked performer (topping Jiseki cycles) among global assets for a few months, which suggested the white metal would underperform along with the broad commodity sector. We cautioned a lot on our blogs and thrice this year at ATMA (association of technical market analysts).
What happened? Silver moved to $50 and collapsed afterwards. Now, it is $4 from $25. This is a 50 percent retracement. I remember receiving calls from housewives, telling me silver is going up. It’s amazing how the frantic call index works. While we were foolishly identifying an extreme and suggesting caution, the sentiment was trapping the emotional people. And, if you think the INR silver and INR gold story is here for good, it’s a currency illusion.
The secular rise in Indian precious metals is mainly owing to the weakness in the currency from 39 to 50 over the last four years. This is a weakness of 20 per cent that is reflecting in the INR silver prices. The INR outlook can suggest a perspective on silver and Sensex. The currency is heading to an extreme, as it tests a decade-long trend line resistance (see illustration). The move up remains a counter trend for us, not only because of the price structure, but also because we fundamentally refuse to overlook the fact the problem is more in Europe and US than in Asia.
The INR should hit the ceiling soon, and till the time the Nifty proves us wrong, by falling through the 4,500-4,000 support zone, we will continue to look at a multi-year bottom in India. The price has to prove us wrong before we get too bearish.
The other interesting question to ask is how low the current counter-trend of gold and silver can persist in the large multi-year secular commodity bull. On one hand, we can look at time retracement for gold, and not really a price retracement, i.e. silver and gold stagnating and consolidating over time, but not falling. But, on the other, research teaches us more about objectivity than subjectivity. So, should we really care for the brighter shine of gold and believe it cannot fall 50 percent like silver. The multi-week for gold and silver remains negative across currencies, including INR.
The current fall in gold and silver should end sometime in the first quarter of 2012, after which the next leg up for gold to above $3,000 should be in 2015-2017. If gold avoids the 50 percent retracement now, be assured it will catch up with it after the peak period. Markets are really funny, sometimes they make you laugh and cry on the same target.