Exiting the 1980 Silver Top
A few weeks back I introduced readers to the Silver Leverage Indicator or SLI, a tool which enables silver (and gold) investors to time multi-year market tops in metal bull markets. The concept was based on an observed fact over forty years of back testing against 43 years of silver prices. That fact was that when silver began to outperform gold by a factor of 1.80 or more, the bull market in question was about to take a rest - sometimes for a long time.
The chart below illustrates this fact. The SLI is graphed in black while the corresponding silver price is in red. When the sell threshold of 1.80 is breached, the bull market in question is basically over and you better get out. As you can see at the far right, the SLI is rising again in tandem with our current silver and gold bull market and one wonders how far it will go this time.
But there is one particular sell signal I want to focus on today and that is the 1980 silver spike when silver hit an all time high of over $50 on an intraday basis. We zoom in on the period of 1979 to 1980 to get a better feel for how the SLI tool was performing over that time. Once again, the silver price is in red.
Now, as silver was moving in the $16 to $18 range back in the last months of 1979, no doubt some were musing that perhaps this was the end of the silver bull. After all, silver had moved from $1.35 to $18.00 in seven years. Surely that was the end of the matter? According to the SLI it wasn't as it hit a high of 1.52 but was well below the sell threshold of 1.80. The SLI was basically saying, "Hang on in there".
Now there was no technical reason why the SLI should go higher at that point. After all, there were other points in our first graph where the SLI fell back from similar levels never to hit the sell threshold. However, for those who believed the silver bull fundamentals were still in place, the SLI was saying that now was not the time to exit.
Indeed, the silver price took off again at the end of November 1979 on a blistering pace to eventually triple in price in a mere two months! As the price took off like a Saturn V, many silver investors must have wondered when this bull was going to end. The answer came over the first few months of 1980 as the price stuttered and then plummeted as quickly as it had risen.
And so we came to Monday the 21st of January as the silver price closed at $42 having spiked to about $50 during the day. No doubt many were expecting more explosive action on Tuesday but that was it. Silver began to drop over the next few days and observers were perhaps calling this a healthy correction. It wasn't, it was the dying swan routine for silver.
Then four days later on Friday the 25th January, the SLI breached the sell threshold with a value of 1.81. Silver had closed at $38.10 and the SLI was at best saying, "Tighten those stops significantly" or at worst just plain "Get out!"
The next trading day on Monday the 28th January, you sold your silver, which closed that day at $37.12. Silver had peaked at $42.07 and you had got out at $37.12. A pretty good deal considering what happened to silver for the next 23 years.
And what about gold during those heady days of 1979 and 1980? We reproduce the graph again but overlay the gold price in red.
Gold also topped out on the 21st January 1980, it closed at $878. When the SLI rang the exit bell on Friday, gold closed at $680. When you exited the following Monday, it closed at $675. If you hung on into March believing it was all just a correction, you would have seen gold plummet to $508. You may have hung out for the rally to $745 in September but the truth be told, you should have rolled your gold profits into the Dow Jones and Bonds by then.
Now 27 years later we find ourselves facing another upleg in silver and gold. How high will this one go? Once silver starts surging again and making new multi-decade highs, will any dip in price be another "healthy correction" or the beginning of the end for this current phase of the generational silver bull market? I can't tell you at what price silver will top out before the next bone-crunching correction. However, with the SLI in hand, we hope to be thereabouts when it happens.
Further analysis of the SLI indicator and more can be obtained by going to our silver blog at http://silveranalyst.blogspot.com where readers can obtain the first issue of The Silver Analyst free and learn about subscription details. Comments and questions are also invited via email to email@example.com.