After Silver's Flash Crash, What's Next? | Steve Penny

Key Concepts

• 1974 Analog: The current market situation is compared to the 1974 period in silver’s history – a consolidation phase following a significant initial rise, preceding a massive surge in 1979.
• Deflationary Impulse: A potential economic downturn triggering a flight to safe-haven assets like gold and silver, driven by Federal Reserve response.
• Gold/Silver Ratio: A key indicator used to determine relative value and potential outperformance between the two metals. A ratio below 45 favors silver, above favors gold.
• Risk-Reward Ratio: Assessing the potential gains versus potential losses to inform investment decisions.
• Probabilities vs. Predictions: Emphasizing a probabilistic approach to market analysis rather than attempting to predict exact outcomes.
• Technical Analysis: Utilizing chart patterns (e.g., bull hammer candlestick, dogey candlestick), moving averages, and volume to identify potential market turning points.
• Platinum Catch-Up: The expectation that platinum will experience a significant price increase, mirroring silver’s earlier surge.
• Dollar Strength/Weakness: Monitoring the US dollar as a potential leading indicator of broader market shifts.
• Energy Sector Potential: Identifying oil and gas as potentially undervalued assets, particularly during a deflationary impulse.

Silver Market Analysis & Historical Context

Steve Penny posits that the current silver market is mirroring the 1974 phase of the 1970s bull market. From 1971 to 1974, silver experienced a 400%+ increase (from $1.28 to $6.70) over 27 months. This was followed by a 40% pullback to around $4, a consolidation period, and then an explosive 8x increase in 12 months (the 1979 moment). He believes we are currently in a similar “1974 moment” – an interim peak followed by consolidation before a potential surge. He anticipates the catalyst for this surge will be the Federal Reserve’s response to the next economic crisis and a resulting deflationary impulse, potentially driving silver into the triple digits and gold above $10,000.

Recent volatility has seen silver fall 47% from a peak of $121.78 to a low of $63.90 in less than a week. Penny suggests the $63.90 low may mark a bottom, citing a “bull hammer candlestick” and decent volume as supporting indicators. However, he acknowledges a roughly 25% probability of another lower low into the $50s, which he would view as a significant buying opportunity, as $50 represents a historically strong support level dating back to 1980 and the 2011 peak.

Trading Strategies & Technical Indicators

Penny emphasizes a probabilistic approach to trading, rather than making definitive predictions. He highlights several key indicators:

• Risk-Reward Ratio: He began taking profits when silver exceeded $115, as the downside risk outweighed the potential upside.
• Commitment of Traders Report: Analyzing the positions of large traders to gauge market sentiment.
• Sentiment Indicators: Assessing overall market optimism or pessimism.
• Candlestick Patterns: Identifying patterns like the “dogey candlestick” (an indecision candlestick) as potential signals of an intermediate peak.
• 200-Day Moving Average: Using the 200-day moving average as a key support level.

Before the recent crash, Penny exited 75% of his PSLV positions and hedged his mining stock positions with options, positioning himself with cash to deploy tactically. He is now “nibbling” at current prices and would welcome a further pullback to increase his position.

Mining Stocks vs. Silver

Penny believes mining stocks currently offer a better value proposition than silver itself. The ratio of junior silver miners (SILJ) to silver was at its lowest point prior to the recent market downturn, indicating undervaluation. While the ratio has normalized somewhat as miners have fallen less than silver, he maintains that mining stocks are still more attractively priced. He cites Rick Rule’s analysis, suggesting that if silver holds $75, mining stocks could see a significant catch-up move. He uses a thought experiment based on the 2016 ratio (0.85) to illustrate potential gains, projecting a SILJ target of $63.75 if silver remains at $75.

Gold & Platinum Analysis

Penny notes that gold has performed more steadily than silver, not even closing below its 50-day moving average during the recent downturn. He emphasizes the importance of the gold/silver ratio, which averaged around 45:1 over the last 100 years. When the ratio falls below 45:1, he favors silver; above 45:1, he favors gold. Currently at around 60:1, he believes gold is attractive for capital preservation while silver offers greater potential for capital appreciation.

He sees platinum as poised for a significant catch-up move, comparing it to silver’s earlier surge. Platinum is currently undervalued relative to gold and other assets, and is attempting to break a 17-year downtrend. He suggests a conservative upside target of $5,000 for platinum.

Macroeconomic Outlook & Potential Catalysts

Penny anticipates a potential deflationary impulse that could trigger a broader market sell-off, including precious metals. He is closely monitoring the US dollar, which he believes is clinging to long-term support. A rally in the dollar could coincide with a panic-driven sell-off in other assets. He also highlights the energy sector (oil and gas) as potentially undervalued, particularly when priced in silver and gold. He suggests looking for starter positions in energy on pullbacks, preparing to buy aggressively during a deflationary sell-off.

Liberty and Finance Information

Kaiser Johnson of Liberty and Finance notes intense market volatility and encourages listeners to call 1-888-815-4237 for up-to-the-minute premiums on gold, silver, platinum, and palladium. Steve Penny’s website, Silverchartist.com, is presented as a resource for real-time alerts and a community-focused approach to navigating the markets. Penny emphasizes the goal of achieving time freedom through strategic investing.

Conclusion

The discussion centers on the potential for a significant bull market in precious metals, particularly silver, driven by a future deflationary crisis and the Federal Reserve’s response. A probabilistic approach to trading, utilizing technical analysis and a keen understanding of historical market patterns, is emphasized. The analysis suggests that while short-term volatility is likely, strategic accumulation during pullbacks could yield substantial returns, with platinum and the energy sector also presenting potential opportunities. The importance of monitoring key indicators like the gold/silver ratio and the US dollar is underscored.