Silver back to Great Depression levels...

 A strong dollar is hurting gold... but it's destroying silver.

 

Gold is down 9.2% in 2014, hitting a nine-month low today. Silver – gold's more volatile partner – is down 12%.

 

Today, we'll revisit the silver-to-gold ratio...

 

Congress established its monetary system in 1792, minting coins using both gold and silver. At the time, 15 ounces of silver would have bought you one ounce of gold. The so-called "silver-to-gold ratio" was 15:1.

 

In the early 20th century, world governments stopped backing their currency with gold. The ratio exploded, hitting 71:1 during the Great Depression.

 

 We're revisiting those levels today. The silver-to-gold ratio is currently 70.2 – its highest level since 2010.

 

Take a look at the chart below...

 

 

 Silver is down more than 2% today to $17.20 an ounce. The reason, again, is the recent strength in the U.S. dollar. As you can see from the chart below, the dollar has screamed higher...

 

 

 The dollar is advancing because the market expects the Federal Reserve to start raising interest rates soon – a sign of an improving U.S. economy.

 

Meanwhile, other global economies – namely the European Union – are in shambles. There's no interest-rate hike on the horizon. Money flows to where it's treated best... Today, that's the U.S.

 

 We're not saying silver can't go lower from here... It was around $4.37 an ounce in 2001 (versus $17.20 today). But the metal is oversold.

 

S&A Short Report editor Jeff Clark showed subscribers how oversold the metal was in the September 12 issue...

 

Silver closed below its lower Bollinger Band yesterday. The metal is oversold and extended to the downside. Following the previous times that happened after a steep selloff, silver rallied immediately.   That's the sort of action I expect we'll see with silver this time around, too.

 Despite the metal's oversold status, the trend is still down. This morning in Jeff's Direct Line – a live-update service for S&A Short Report subscribers – he wrote...
 

The dollar is viciously overbought, and metals are equally oversold. So, the stage is set for a reversal. But... and this is the running theme... the stage has been set for several days and so far the trend just continues. We can't fight it. We'll just have to wait until the trend exhausts itself and then react to the reversal.

 The dollar is up for the eleventh straight week... It's the longest rally in nearly 50 years. From its low in July, the dollar is up nearly 7.3% – a huge move for a currency.

 

As oversold as silver is, the dollar is similarly overbought... As True Wealth Systems editor Steve Sjuggerud pointed out, we now have a "positive sentiment extreme" in the U.S. dollar.

 

If you're not familiar, True Wealth Systems uses quantitative methods to find the best "buy" and "sell" points across 40 different markets and sectors.

 

Steve and a team of programmers spent years (and nearly $1 million) developing this advanced computer system.

 

The algorithm Steve and his team created scans global markets looking for specific indicators that signal a "buy" or "sell." Some of the variables are simple, like interest rates versus bond prices. Others are much more complicated.

 

 And while the system isn't saying to short the dollar yet, the setup is getting juicy.

 

Steve – along with his research analysts Brett Eversole and Rick Crawford – recently launched a weekly "Review of Market Extremes"...

 

Every week, Steve and his team share the greatest extremes in the market – like the selloff in corn or the rout in gold prices.

 

In his most recent update, Steve discussed the dollar...

 

Positive sentiment extremes tend to occur when the dollar peaks. And they almost always lead to a fall in the dollar over the next few months.   The chart below shows this in practice. It's a five-year chart of the PowerShares U.S. Dollar Bearish Fund (UDN). As an inverse fund, UDN moves higher when the dollar falls, and it moves lower when the dollar rises. The green circles highlight times when SentimenTrader's Jason Goepfort's Optix reading hit a bullish extreme.   Take a look...     We've seen bullish sentiment peaks in the dollar nine times over the past five years. They tend to occur just before the dollar begins falling and UDN rallies. The table below shows the full details...   Dollar is Loved UDN Peaks Time (months) Return 2/8/2010 3/16/2010 1.2 1.0% 6/7/2010 11/4/2010 4.9 16.2% 10/3/2011 10/27/2011 0.8 6.6% 12/19/2011 2/28/2012 2.3 3.3% 5/28/2012 6/19/2012 0.7 1.7% 7/23/2012 9/14/2012 1.7 6.1% 3/25/2013 4/16/2013 0.7 1.4% 5/20/2013 6/17/2013 0.9 4.3% 7/8/2013 10/25/2013 3.6 6.8% Average   1.9 5.3%

 

 As you can see, based on history, shorting the dollar when sentiment peaks generates average returns of 5.3% in about two months... or more than 30% annualized. And while we're seeing extreme positive sentiment for the dollar today, it is still marching higher. Steve isn't shorting just yet.

 

 

 New 52-week highs (as of 9/29/14): CF Industries (CF) and Altria (MO).

 

 Today, one subscriber wrote in with his analysis of the refining industry. What's on your mind? Drop us a note at feedback@stansberryresearch.com.

 

 "Regarding the current 'glut' of light sweet crude from shale: Partly this 'glut' is transportation-related. And regarding the 'shortage' of sour crude: there is never a physical shortage of this stuff; the shortage is economic in the sense of 'lost opportunity' for refiners. The refining business is really competitive – I worked in it for a long time. Refiners will try any operational technique or plan to save a penny per gallon. For the last 20 or 30 years the sources of 'good' crude have been declining prior to the fracturing revolution. Heavy sour crude was the only 'open-ended' supply, coming almost entirely from overseas and Mexico.

 

"Refiners spent huge (I mean huge) amounts of capital to deal with this heavy crude which was considerably cheaper on the world market. Unfortunately, to make money with this capital investment, the heavy sour crudes must be available at somewhat distressed prices. So today, there is a looming 'lost opportunity' to recover a payout on heavy crude refining investments if plenty of cheap sour crude is not available. Plenty of gasoline and jet fuel can be made with light sweet crude; but that costs more and the typical refiner sees a large investment in his heavy sour capacity sitting idle or under-utilized, not earning a payback on large amounts of capital.

 

"The key here is that the poor crudes must be available at a somewhat distressed price for heavy crude refiners to recover the capital cost for much of their facilities. The consumer is really unaffected by this (well, maybe very slightly affected.) So this problem for refiners will generate no sympathy from the general public. I personally would not invest in a heavy or sour crude oil or tar extraction project for the next ten years. The world can get along without more of the stuff, even though it's not a pleasant situation for refiners. Declining wholesale gasoline prices tell the same story." – Paid-up subscriber Lou Tichacek

 

Regards,

 

Sean Goldsmith

September 30, 2014