Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Is the Stock Market Overbought What Does it Mean for Gold and Silver?

Commodities / Gold & Silver 2009 Aug 30, 2009 - 02:01 PM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleI have to confess to a love affair that goes back a long ways with that exciting, hyper-volatile metal-- silver.

This week The Wall Street Journal reported that silver has enjoyed greater price gains than gold so far in 2009.  The Journal noted that silver often follows gold, although sometimes with greater moves since it is a less-active market and thus more prone to volatile price swings. Naturally, silver’s stillness is limited to many consolidation periods, and to the early parts of a particular upleg. When silver finally does move near the end of a rally, the move is likely to be substantial. So far in 2009, December silver futures have risen 26%, while December gold is up 6%, the Journal reported.


Knowing about the relationship between silver and gold can mean large profits at the right time, so I would like to revisit this topic.

Silver, sometimes referred to as "poor man's gold," is often bought alongside gold as a hedge against dollar weakness, inflation fears and geopolitical turbulence. But silver also has a more significant role as an industrial metal because of its application in batteries, cell phones, computers, TV’s, refrigerators, medical applications, satellites, weapons systems, electrical wiring applications, etc.  In the majority of cases this silver is never recovered. Once it’s used up, it’s used up.

As mentioned earlier, the rule of thumb is that generally silver initially lags behind gold, but as gold gathers steam, speculators flock to silver and ignite the sharp moves higher for which this fidgety metal is so famous. We can also expect silver to drop faster than gold during a recession. We saw that in the recent stock panic when gold was fairly resilient while silver nose-dived. The yellow metal hit a 14-month low at its worst, while silver spiraled down to a 34-month low.

Today there is a confluence of factors on the demand side for silver:  Investment demand, industrial demand and the fear factor due to the economic situation which has not yet resolved itself. We also need to keep in mind that we have another factor, one I touched on last week-- almost 2 billion new consumers in China and India who are moving into middle class status and are acquiring a taste for gadgets. Gadgets require silver. In other words, there is a growing demand for silver as an industrial metal and as an investment vehicle while the supply continues to dwindle.   

Looking back at history we learn the lesson that we can expect silver to drop faster than gold during a recession, and silver to rise faster than gold during a bull market in the metals.

A simple application of this observation is to trade silver for gold in the middle of a recession, when a bull market in gold and silver is about to start, and to trade gold for silver at the top of a bull market in precious metals.

Today’s ratio of gold to silver is 64.6 ounces of silver equal the value of one ounce of gold. With gold today at $956, and a normal, historical 12 silver to gold ratio, (referring to its occurrence in nature, and ratio’s value through centuries) silver should be trading near $80.This is about 400% higher than it was trading for this week. So, if the price of silver gravitates to its historic ratio, we can bank on some nice profits. It’s impossible to tell the exact date when this would take place, but I expect the ratio to go much below its historical average of 12, most likely in a few years.

Since we’re already on the subject let’s begin with analysis of the silver chart.

Silver

As far as timing the silver market is concerned, the similarity is still intact between the two time frames that I mentioned in the previous Premium Update.  The situation developed as I expected and we saw higher silver values this week. Not only did silver manage to stay above the long-term support lines, but it was also able to once again move above the short-term one. Moreover, this move (which took place on Friday, August 28th) materialized on high volume (as marked with the blue arrow on the chart above), which serves as a confirmation of the bullish signal.

The bottom in silver was accompanied by a buy signal from the Stochastic Indicator, which was also the case at the end of January 2009. Back then a relatively large rally followed, so this may also be the case here. Naturally, we may need to wait for additional few days of prices closing above the 14.5 level in order to confirm the move, but given the size of the volume on Friday, I think it is likely that we will move higher from here.

The analysis of the medium-term chart emphasizes the size of the volume of Friday’s session. Combining this bullish signal with the cycle analysis that I’ve featured suggests that higher prices are to be expected from here – with a local top several weeks away.

General Stock Market

For a considerable amount of time the main stock indices have been rising on a declining volume. Such a divergence usually suggests that the rise is only temporary and that the true price direction is down. Whereas this could be the case here, I would like to point your attention to the fact that the level of volume we are seeing is not yet screaming “sell”.

Since it is the long-term tendency that is the subject of this analysis, I have used the weekly chart that filters out the daily noise. The weekly SPY ETF chart makes it easy to compare the volume that accompanied previous tops to the volume in the previous weeks.

Please note that past tops were mostly accompanied by volume that was visibly lower than what we have seen in the past several weeks, so we may indeed move even higher (The next Fibonacci resistance level is just below 110, which is also close to the upper border of the price gap - 108.02, which formed in early October 2008) before correcting.

Summary

This week the precious metals sector moved higher; silver rallied on strong volume, which may mark a beginning of a new substantial upleg. Gold is currently in a cloudy technical situation, and much depends on what happens in other markets.

The value of the main stock indices is naturally an important factor as well, especially for PM stocks and silver, due to its many industrial uses. For now the general stock market is overbought, and it moves higher on a declining volume, but the size of the volume is not yet very low, so it would not surprise me to see even more strength in DJIA and S&P 500 before they make a move lower. It’s too early to say whether such a move would drag PMs down along with them. Additional signals come from our indicators and from the analysis of other markets, but I will leave that part of the commentary to my Subscribers.

To make sure that you get immediate access to my thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time. Additionally, if you considered subscribing to the Premium Service in the past, but didn’t want to use monthly subscription type, we have good news for you – we have just introduced 90-day and yearly subscriptions, which are available at a discount.

    P. Radomski
    Editor
    Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw RadomskiArchive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules