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Why Silver May Soon Be Heading for $40

Commodities / Gold and Silver 2012 Dec 11, 2012 - 06:38 AM GMT

By: InvestmentContrarian

Commodities

George Leong writes: Silver continues to hold strong on the charts, with a possible upcoming move at the tough $35.00 resistance level and potential retest of the $40.00 level. The aggressive upward move has largely been driven by the move in gold, along with speculative trading.

Buying in the white metal is generally in line with global economic growth, which drives the demand for industrial goods that use silver as a raw material, while it also pushes up income levels and the global demand for silver and gold jewelry.


Here in the U.S., the economic recovery is faring well. The better-than-expected U.S. gross domestic product (GDP) growth revised up to 2.7% for the third quarter, along with other encouraging economic data, is also adding some optimism of economic renewal.

While gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as silver—unlike gold—is used in numerous industrial applications.

The price of silver has had some bull legs on the chart since its breakout in August, based on my technical analysis.

As you can see on the chart below, the upward move in prices for March contracts above the 50- and 200-day moving averages (MAs), which is bullish. The March silver is also showing a bullish golden cross with the 50-day MA of $33.09 above the 200-day MA of $31.06.

The MA convergence/divergence (MACD) is also quite bullish, but it may be approaching a top. The risk is that the run-up appears to be overextended and vulnerable to some near-term selling pressure with resistance at around $35.00. For the white metal to advance, we need to see a strong break just above $35.18 and the 13-week high of $35.51 to target the 52-week high of $37.43.


Chart courtesy of www.StockCharts.com

If silver can hold, we could soon see the metal take a run at $40.00 and the $50.00 level last reached in April 2011. Trading in this metal tends to be quick, so you need to watch closely. A move could be steady and follow the economic renewal, or it could surge, driven by speculative trading.

Ultimately, where silver goes will depend on the global economy. The same goes with copper, which moves in relation to the economy and GDP growth.

Looking at it from another angle, the fixed exchange rate between gold and silver was 15.5:1 in the nineteenth century, but moved much higher to average 47:1 in the twentieth century. The spot gold price was $1,712 on Monday, compared to $33.23 for spot silver. This equates to a current gold–silver ratio of 51.52, which means that the white metal could be undervalued, based on this ratio, and could head higher towards the $36.00 and $40.00 levels.

The bottom line is: we need to see a strong move above $35.00 to give us any confidence that silver can hold and head higher.

Source: http://www.investmentcontrarians.com/stock-market/why-silver-may-be-heading-for-40-00/1115/

By George Leong, BA, B. Comm.
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

George Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. See George Leong Article Archives

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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