The Gold/Silver Trade for Late 2011

11/04/2011 3:30 pm EST


John Jagerson

Co-Founder and Contributor,

Gold’s outperformance relative to silver presents a very good profit opportunity for the remainder of 2011, predicts John Jagerson, who likes using ETFs to trade the metals most effectively.

Lots of traders are trading gold or gold ETFs these days, and the silver market has become really volatile as well. But are these markets similar, and can you use the same strategies on both?

Our guest today is John Jagerson to talk about that. So John, do you use the same strategies on gold and silver?

Yes and no; but it’s important to understand that gold and silver are very related in the sense that they are considered “safe-haven” investments, and historically, they’re used as currencies.

So they will share some of the same attributes, but they’re different enough that it can actually be turned into an opportunity.

Talk about that, what opportunity?

Well, for example, gold does really well in a high-fear, low-interest-rate environment, which happens from to time to time. Silver, because it bridges the divide between commodities and money commodities like gold, it’s somewhere in the middle.

It can be very heavily influenced by expected demand for commodities, so in a bear market where growth is looking more uncertain, gold may actually do really well, while silver will struggle and begin to trail after industrial metals in general.

So as we finish out 2011 into 2012, do you have some predictions for gold and silver?

I think both of them have a likelihood that they’ll do well, but with lower growth expectations, silver is likely to trail gold significantly.

So it bridges this gap between commodities and safe-haven investments, and in a market like this, it can trail after industrial metals and be a lot more correlated with commodities in general than gold will.

That’s an opportunity for traders that can pair the two of them together—like you would in the stock market or even with currencies—as a long position on gold is likely to improve or outperform silver itself.

So regardless of which direction the market goes, as long as gold is outperforming silver, with a long gold position combined with a short silver position, you’d wind up making money.

I know a lot of traders like trading the ETFs on gold and silver. What do you like to do? Is it the futures, the ETFs, gold stocks perhaps? What is your favorite?

I’m a big fan of the gold and silver ETFs. They’re very liquid, they have a tight bid-ask spread, and it’s easy to trade within an ordinary brokerage account. So I am a big fan of those particular ETFs, but I think that the gold and silver futures contracts are also very attractive. They’re very liquid, easy to trade, but that can be a little bit of a higher-level trade.

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