QUICK LOOK REPORT #36: The Fibonacci 
Cycles for Comex Silver
by Dr. Stephen Rinehart
December 14, 2006

Background:

The research in this report examines the possibility that “Fibonacci Cycles” superposed on a linear (or nonlinear) trend may currently compose over 85% of the daily closing price action of a Comex Silver dataset  from 1966 through Dec 2006. Fibonacci Cycles are mathematical relationships found throughout nature and in various markets. The Fibonacci Cycles considered for the study are : 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, and 4181 trading days for the given daily dataset (add the previous two cycles together to get the next longer cycle). This is strictly a plausibility study and it remains to be seen what predictive powers are possible with a strict Fibonacci cycle approach over the long term but prior back-testing looks promising for the Fibonacci Cycles as turn indicators. The Fibonacci amplitudes (for long term cycles) appear to be rather steady for the daily Comex Silver dataset!? Do not attempt to trade these charts as it is unclear what the real accuracy of this approach may be (if any) and we will report predictions versus actuals in the future for a number of indices and precious metals and also continue to correct the trend if Silver moves into a new stage. 

Gold prices follow a large 86-month (2584 day) cycle which recently bottomed and it would be reasonable to expect such a cycle also exists in Silver. The Fibonacci Cycles are found by using a proprietary nonlinear filter on the real-time dataset. The software is not yet available commercially but provide both time and price information and thus a Fibonacci Cycle is a type of Gann-Cycle (or may encompass the results of Gann Cycles if the correct amplitudes are found). The overall basic trend of a dataset is established by using a Low Pass Filter which is adjusted to the best overall rms (root mean square) fit of the given dataset.

Chart 1 shows the results of the Low Pass Filter in establishing a conservative trend in Comex Silver prices. The current slope was assumed to be $0.013 per day in silver for this study (which is roughly one-half of the slope since Oct 2005). This may have to be adjusted be slightly upwards after March 2007. The large spike in silver prices in Jan 1980 resulted from the Hunt Brothers attempting to corner the silver market. By early1979, the silver prices had increased to a point where Kodak could start unloading all its WWII silver stockpiles since its silver was worth more than the entire net worth of the company. A close contact at Kodak at the time told me later that Kodak did start unloading its silver stockpiles which crashed the silver market  (unclear but may have been at request of the US Government). Kodak walked away from the table with a significant portion of the Hunt’s money for its efforts.

Chart 2 shows the Fibonacci 987-day cycle in the daily closing prices of the Silver Comex  dataset from 1966 thru 2006. Although the 2584-day cycle is a large cycle in Comex Silver at different periods, it was the increasing amplitude of the 987-day cycle in silver prices that flagged the long-term upward movement of Comex Silver in the late 1970s. It appears from this study there was a longer term stealth mode to Comex Silver prices increasing form early 1978 (i.e., some other major party may have been involved in buying-up silver for two to three years ahead of the Hunt’s brothers failed attempt after the Hunt Brothers tried to jump the silver bandwagon). The silver price increases/stockpiles may have been based in part on the huge projected increases in silver in electronics/combat weapon systems for the Reagan “Star Wars Initiative” and who better to store the Government’s (huge war material) silver quietly than Kodak? Was it really the Hunt Brothers who were attempting to corner the silver market? This graph shows a “seven-cycle” decay which is common for large cycles after a major peak and conversely we may now see a seven-cycle build-up (987 days x 7 cycles = 6909  trading days to come in silver  or over 27 years). Thus, by 2034 the price of silver may be sufficiently high that it is no longer traded on exchanges but hoarded by Government (s?) and you can buy a new Asian suit for a $5 silver coin.

Chart 3 shows a short-term prediction for the daily closing Comex Silver prices from Jan 2007 thru March 2007. It suggests that silver prices are consolidating and forming a  triple bottom. After March 2007, it is predicted that a strong rally will continue in silver prices (also predicted for gold prices). The fun has not yet started Wall Street! 

Chart 4 presents the prediction for 2007 in Silver prices assuming a linear trend of $0.013 increase per day. This trendline could be $2.50 higher by the end of the year if the current six-month support continues and we will correct, if necessary, on a monthly or quarterly basis. If we use the 987-day cycle with Fibinacci corrections at the bottoms it is possible to project the price of Silver close $150 an ounce by 2018 (based on the current trend) and we once asked the question will gold reach $2018 by 2018. If one divides $2018 by 15 (gold/silver ratio), we get a possible silver price of $134.50 per ounce which is close to current trend line.

Remarks: 

1. We remain in a rather neutral situation regarding the Silver Comex for the next three months but with an upside bias. A double bottom in Feb 2007 should signal the start of the next major upleg in silver. 
2. Silver is probably not the best choice right now to demonstrate the plausibility of precisely Fibonacci cycles actually present in the markets because its major cycles  are coming off a multi-decade decay and just reaching bottoms. It is believed that Silver prices are just beginning a multi-decade run (only if supply lasts so hurry China and Mexico and Peru and Argentina and Canada and United States and….find new mine supplies as 78 million Boomers may be retiring into precious metals in the coming decade. Watch the hype in 2010/2011). It will not happen again.
3. Investing in silver coins/bullion over the next ten years could result in a 10X+ investment gain. Do it slowly as we have been urging for several years and take physical possession of the gold and silver.
4. The interesting period comes after March 2007 with a strong rally coming in silver prices as the USD continues to wobble on its vertical axis like a gyroscope slowly losing its angular momentum (increasing wobble can also happen to this planet if the polar caps continue to melt as was investigated once by Einstein because of the huge redistribution of water mass to the equator – called pole shifts resulting in earthquakes off the Richter Scale due to changing loads on the continental plates). 
5. The angular momentum (gyroscope) analogy in the financial world  holds as more USD are printed the more they add to the weight at the financial equator (which are derivatives and currencies and bonds) and the more you have to add because the rotation (circulation) slows (as debt grows more people drop out of the game). It is Catch 22 until the USD and current financial system implodes – it is an irreversible financial path for USD at this point and there is no turning back as we have passed the point of no return and the debt cycle for US will go unstable as the world cycles out of USD. Limit (debt) cycles do not remain limit (stable) cycles in any system with a continuing increase in the forcing function(called M3 pumping). The producer (gold/silver) wins and the debtor (USD) ultimately loses. For a while longer, we get to live in denial.

Hypotheses: Seven major “Fibonacci Cycles” in virtually all the worlds’ indices and commodities and yields may have determined our interest financial lives far into the past (and for many decades) and may still be present in the markets today but masked by high levels of M3 liquidity. What you gonna do when the Fibonacci Cycles come after you?

© 2006 Dr. Stephen Rinehart
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Dr. Stephen Rinehart
Lynn Haven, FL USA
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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, the author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.