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Sprott Silver ETF Signals XAU Upturn

Bob Moriarty
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May 12, 2015

The gold "PermaBulls" have cost their followers a lot of money over the past 15 years. We all know who they are. Gold is supposed to go up every single day or it's "proof" of a conspiracy of the evil bullion banks that manipulate gold at every turn. Silver is supposed to go to $500 an ounce in a vacuum while everything else stays the same because it's so rare that the world ran out in December of 2001 while no one noticed or cared.

Gold, silver and resource stocks are markets like all others. I like gold as money a lot more than I like the word of Obama, the wisdom of Yellen or the value of paper money. Right now at 73 ounces of silver to an ounce of gold, silver is pretty cheap. But they are still markets to be traded. If you will buy cheap and sell dear, you will make money. If you don't, you won't.

Those who have followed me over the years know that I do believe in contrarian thinking. I don't believe in either fundamentals or Technical Analysis. I suppose it's possible to make money following fundamentals or TA, I just have never met anyone who did make money on a regular basis using either or both. They give you some information but I'm not convinced either really works if your goal is to make money investing.

I am always looking for measures of pure psychology. Bullish Consensus is one; back in April of 2011 the Bullish Consensus on silver was higher than it was in January of 1980, at the very peak of silver at $50.25. Likewise, the Bullish Consensus on gold was lower in November of 2014 than it had ever been. I was and am convinced that was a bottom for gold and gold should go higher from there.

I find the Sprott Physical Silver Trust to be an excellent measure of psychology. Frankly, silver "PermaBulls" are totally nuts. Every charlatan in the financial world has led them down a primrose path for years. Silver went from $1.29 in the 1960s to $50.25 in January of 1980 and all you could hear is "Buy, Buy." It then crumbled to $4.01 in late November of 2001 and no one in investing thought it was worth owning. Save at least one that I can think of. Silver almost regained it's 1980 high in April of 2011 and the fools braying, "Buy, Buy," sounded like the hounds of hell. Naturally silver tanked to nearly $14 3.5 years later. Now everyone hates silver. That's good. It's cheap now. It was expensive in 2011.

The Sprott Physical Silver Trust posts their relationship to NAV daily. It signaled a high in 2011 and negative discounts have been excellent as precursors to the XAU moving higher. I have attached some charts showing the extremes of emotion and what the XAU did in response.

sprott_silver_nav

Since the Sprott Silver ETF began in late October of 2010, the most discount it has ever closed at was 0.9% on June 25th of 2013. If you used that discount to reflect an extreme of emotion and bought the XAU, there was an increase in the XAU from 82.29 to 115.21 two months later. That's a 40% increase or 240% annualized.

The next time the Sprott ETF hit a similar extreme of emotion was on December 26th of 2013 when it measured a 0.75% discount to NAV. The XAU climbed from 79.93 to 107.39 in 2.5 months. That's a 34% rise or 163% annualized.

As of December 26th of 2014, the Sprott ETF discount reached 0.47% as the XAU touched about 62 before climbing to 83.22% in the next six weeks for another 34% rise.

So when I looked at the Sprott Silver ETF NAV today, it struck me that we are at or near another extreme of emotion as measured by how much silver is hated. The discount as of the 11th of May is 0.57%, lower than in December and nearly as low as it was in June and December of 2013.

xau2yr

I believe the discount to NAV for the Sprott Silver Trust is at or near an extreme and that extreme of emotion will translate into a sharp rise in at least the XAU over the next six to ten weeks. If you were willing to do the work, you could compare the numbers for the other gold/silver indices and find something similar.

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Bob Moriarty
President: 321gold
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