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The Silver Greenback: Learning How to Play the Cycles
 
By Joshua Enomoto, Founder of ContangoDown.com and CrushTheStreet.com contributor
 

The current financial landscape is, in a word, perplexing: while stock market indexes are breaking record highs and therefore, providing a quantitative measure of economic growth, the sentiment on the street has not confirmed the optimism of the expressed numbers. The American people were told multiple times that the labor market was improving, coincidentally during the run-up to President Obama’s second term…maybe if it’s repeated long enough, the masses will believe it?

Which makes the most recent jobs report all the more fascinating: only 88,000 positions were created for the month of March, accompanied by a sharp drop in the size of the actual workforce. While arguments can be made surrounding the alleged manipulation of the employment numbers, with the fact that the same report indicating a reduction in the jobless rate lending fuel to the fire, the data will have to be accepted for what it is. Ultimately, the trend is what’s important here, with recent accounts substantiating the dichotomy between the “published” numbers versus the “real” numbers.

Going forward, at least for the near-term horizon (2 – 8 months), we could see a shift in monetary cycles. Proven that suggestions by the Federal Reserve to eliminate quantitative easing were more premature than Bob Dole, “money printing” may find itself right back on the table. After getting hammered by the Japanese Yen in the soon to be fabled “Currency War,” the foreign-American central bank (and no, that is not a typo) will need to assert itself in the global market lest it get blown clean out of the competitive valuation threshold.  
 
Let’s take a look now at the technicals for the US Dollar index (3-year daily chart):

USDX (04052013) A  
The long and short of it is that the greenback has not risen confidently past the 83-mark: while 83 is an indication of strength, at least compared to the other major currencies, it has failed to breach a declining resistance line from June of 2010. This makes the specter of a low-80 re-test more likely, and as has been drawn in the above chart, a “mountain top” formation could occur on the technicals like it did between May – September 2012. Also, indicators such as the MAC-D and the RSI both confirm a decline in momentum and taken in context with historical precedents, it would be surprising to see any other outcome but down.

Such a let-off should be a welcome event for precious metals investors, who have been suffering through a recent splash of bearishness. For silver in particular, the volatility has been pronounced, with the white metal at one point trading under $27 per troy ounce:

Silver (4052014) B  
What’s interesting here is that we have all seen the same story before: back in 2012, specifically between May and September, the dollar spiked up, sending silver down to $26.20 at the bottom. However, speculation began heating up regarding the announcement of QE3, which ultimately sent silver to $35, a 33% trading opportunity for those that were paying attention.  
 
Here in 2013, the period between February and April saw the dollar rise more than 5%, an astonishing percentage move in the FOREX market! Like clockwork, silver declined precipitously, also touching the $26 mark. However, a similar turnaround could result in another profitable opportunity.

Last year, the price action for silver funneled into a pennant formation, leading many analysts to suggest that a “pop” was imminent. Sure enough, a “pop” did occur, although one of the bearish variety. Similarly, silver from October 2012 to the end of March 2013 was also funneled into a pennant formation, but disappointed again with a return to the 26 level. The patterns are difficult to ignore and with the dollar facings its own batch of technical weakness, the precious metals complex could see higher valuations from here.

Of course, the FOREX market may offer up a wildcard in the form of the Yen, which has hit 3 ½ year lows, getting ever so closer to that USD/Yen ratio of 100 (97 as of this writing). If the Yen continues to “surge” ahead with its inflationary protocol, the dollar would be a natural recipient of relative strength. The case, then, for $17 silver potentially comes alive:
 
Silver (04052013) C   
While this may be the stuff of dreams for a few obsessed silver stackers, I don’t see this happening any time soon. For silver to bottom out like this in light of the industrial and investment demand would require more than one paradigm shift to occur in the financial markets, but the margin for such drastic moves is impossibly thin. The dollar is clearly having trouble following a tremendous bull run, and fundamental factors are no longer in favor of a deflationary currency. Again, in the near term, a buying and trading opportunity is making a cyclical comeback, one that deserves more than a passing glance.

 

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