Silver Continues to Shine Like Gold

04/06/2011 6:00 am EST

Focus: COMMODITIES

Technical and fundamental factors indicate that silver’s meteoric run to new all-time highs may well continue. Watch the moving averages and look to buy SLV on any corrections, says one expert.

As traders and investors wait for central bank decisions to hit the wires this week, equities around the world will likely continue to feel the pressure of rising oil prices, especially as West Texas Intermediate (WTI) crude futures pushed past $108 a barrel early in the week.

Likewise, precious metals are gaining momentum on continuing fears of rising inflation and general economic uncertainty. Gold jumped to over $1,450 an ounce on Tuesday, while silver hit an all-time high of around $38.93 an ounce.

While the two metals usually move hand in hand, silver has been outperforming gold in recent months, and it seems that silver still has room to run if it were to fully catch up with gold from a historical perspective.

As always, we start with a long-term perspective, then gradually zoom in and pick the latest significant trend you wish to focus on. Consider the daily chart below for the iShares Silver Trust (SLV), which tracks the spot price of silver bullion.

Since its low point in October 2008 (at $8.45 per share), SLV has been in a clearly defined uptrend. During the fist wave, starting from September 1, 2008 until September 1, 2010 (red horizontal line), SLV would rally higher, then gradually come back down towards its 200-day moving average (yellow line).

chart
Click to Enlarge

After September 1, 2010, however, SLV clearly defied its past wave-like pattern and entered into a far more aggressive uptrend. Notice how after the red horizontal line, SLV’s uptrend becomes steeper, and even more importantly, the fund uses its 20-day (green line) as primary support, unlike the initial phase of its longer-term uptrend, during which SLV would use its 200-day moving average as support.

This ETF appears to bounce off its 20-day moving average every time it hits it, except in January of 2011, when SLV endured a slightly greater correction just underneath its 50-day moving average.

Given that SLV has continued to soar to new highs after bouncing off its 20-day moving average, its fairly safe to say that until SLV breaks below its 50-day moving average (blue line), the uptrend is still fully intact.

How to Play Silver’s Ongoing Rally

SLV opened above $37 a share for the first time on Monday, and the fund will likely continue higher in the coming weeks given the longer-term strength of its uptrend and supporting fundamental factors.

The next likely level of resistance is the $40 mark, while support comes in at the 20-day moving average, right above $35 a share. Any brief correction may be used as an entry point, while a close below its 20-day moving average should be treated as an alert, since the fund may then quickly fall to its 50-day moving average or even lower.

Technically speaking, SLV remains in a strong uptrend, and from a long-term perspective, investors can use dips/corrections as great opportunities to establish long positions. When taking into account fundamental factors, the case for SLV remains bullish.

This precious metal not only mimics the safe-haven traits of gold in serving as a hedge against inflation, market volatility, and geopolitical tensions, its demand is actually primarily driven by industry.

In fact, GFMS forecasts that industrial silver demand will rise by one-third in the coming years, up from 15,000 tons in 2010 to over 20,000 tons in 2015. Economic momentum in emerging markets is also picking up, and likewise, the price of silver is increasing thanks to rising incomes and growing demand.

By Stoyan Bojinov, contributor, ETFdb.com

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