Will Gold's Historic Bull Run Spill Over into Silver?

11/09/2009 10:07 am EST

Focus: COMMODITIES

The silver market is definitely playing second fiddle to its more glamorous "yellow metal " cousin, as nearby silver futures have not even reached yearly highs, while gold continues to move into uncharted price territory. One of the possible reasons why silver has not garnered the same attention as gold may be due to its usage as an industrial metal. Despite signs that the worst of the recession may be behind us, we have only started to see improvements in industrial demand for silver. Until demand really ramps up, a significant market segment remains reluctant to bid up prices to obtain supplies.

The media's fixation with gold's move to all-time highs has spurred interest by the public at large into gold as an alternative investment to equities and bonds, with memories fresh to the steep stock market selloff we saw earlier in the year. Silver prices, meanwhile, are still well off historic highs made back in the first quarter of 1980, when a short squeeze saw prices run up to almost $50 per ounce! It certainly appears that the old market adage "Buy low and sell high" is not how the public invests, but "Buy high and try to sell even higher " might be more appropriate!

One indicator that metals traders look to for the comparative value of gold versus silver is the gold/silver ratio. This ratio measures how many ounces of silver it takes to buy one ounce of gold. As of this writing, the gold/silver ratio was trading around 62.5. In other words, 62.5 ounces of silver is needed to buy one ounce of gold. Although this is historically a rather high ratio, it is currently in the middle of the recent range between 45 and 85 that we have seen the past few years. It may take a move to the high end of the ratio before "value" traders start to embrace silver as an alternative to gold.

Looking at the daily chart for December silver, we notice the market continuing to hover near the 20-day moving average. We appear to be in the midst of a consolidation phase, as prices have moved within a $2.50 range since September. Though the major trend favors the bull camp, we do notice a significant bearish divergence in the 14-day RSI, which failed by a wide amount to make a new high reading when the futures did on October 14.


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Though this is a potentially bearish signal, the uptrend would not be negated until we see a daily close below the uptrend line formed from the November 2008 lows currently near the 14.35 area, or just over $3 below our current price levels. Resistance remains a good deal closer, coming in at the October 14 high.

By Mike Zarembski of OptionsXpress

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