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The price
of silver reached a 5-month high this past week as investor interest seems to
have been rekindled in both gold and silver as belief in financial markets
increases that the latest round of monetary easing from the Federal Reserve -
QE3 - will soon be on its way. Many investors had largely stayed away from
silver in recent months after some had got caught up in its volatility.
Silver had touched a 30-year high in April 2011 before plunging 35 percent in
a few short weeks.
Now the volatility is back - but on
the upside - as prices have climbed more than 20 percent in less than a
month. The gains have outpaced that of gold which rose roughly 10 percent
during the same time frame. Importantly for investors, the ratio between the
two precious metals has moved about 10 percent in silver's favor since
mid-August. This is the first time silver has outperformed gold since the
start of 2012.
For non-futures investors, the two
precious metals can easily be tracked through the use of exchange traded
funds (ETFs). The most liquid ETFs for the two precious metals are the iShares Silver Trust (NYSE Arca: SLV)
and the SPDR Gold Shares (NYSE Arca: GLD)
respectively.
You can take a look at my long term
outlook analysis from last week here: http://www.thetechnicaltraders.com/gold-stand...-the-back-door/
Some may wonder why has silver
outperformed gold in the past several weeks? The
answer goes deeper than just confidence that QE3 is coming soon, but it is
still rather a simple one. The sharp rally in silver was fueled largely by
short-covering. That is, some investors (hedge funds, etc.) had made rather
large bets that silver would continue falling and were caught off-guard by
its recent rise. According to data from the Commodities Futures Trading
Commission, the silver market during the week of August 27-31 saw the largest
amount of short-covering since May 2011. At the same time. Bloomberg reported
that hedge funds were the least bullish on silver in almost four years.
It is unknown for how long silver
will outperform gold. But even some long-term fundamental investors such as
legendary commodities investor Jim Rogers has said that he believes silver
right now is a better investment than gold. He points to the fact that
historically gold has been worth about 12 to 15 times what silver is worth,
but that recently it has been worth roughly 50 times silver's value. Silver
is also the only major commodity not to have reached a new all-time high in
the decade-long commodity bull market and is still cheaper than it was 32
years ago.
So it may be worth a look. But since
silver is so volatile, wait for a downward spike before initiating or adding
to a long position.
Chris Vermeulen
Editor, the
Gold and Oil Guy
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