Finally a Silver Lining?

by Brad Zigler

Real-time Inflation Indicator (per annum): 10.0%

The overnight market wasn't good to silver. By 7 a.m. Eastern Time, COMEX futures were down more than 3.5% ahead of the London cash market fix. But that shouldn't come as a surprise to metals traders. After all, silver ran the table in the last trading week of 2008, rising 7.7% in the spot market against gold's 3.9% gain. A reaction ought to be expected, right?

There are a lot of silver bulls out there salivating at the prospect of a white metal breakout. For far too long, many say, silver's been undervalued. It's as if the gold/silver ratio — now at 78-to-1 — has mocked them. Gold just seems to get all the glory; silver, the dregs.

The gold silver/ratio itself seems primed for a breakout. Just look at the chart below. A pennant flag's formed as the ratio's trading range narrowed over the past quarter. That's the trading equivalent of mashing a coiled spring. The spring uncoils violently if the pressure's suddenly relieved. The fun part's guessing the reaction direction: up or down?

Gold/Silver Ratio

Ratio traders have a further complication: Does gold or silver make the move? After all, the ratio expresses gold's price multiple over silver. A falling ratio — the scenario so earnestly sought by silver aficionados — can be wrought by either gold's decline or by silver's ascent, in absolute or relative terms. Which is more likely?

Well, look back to September 2008 for a clue. In just three weeks, gold's multiple shot up to 84 from 66 amid all the early recessionary hoopla. The yellow metal lost 8% while silver tumbled 28%.

If you believe we've got more disinflation ahead, bank on the ratio moving in favor of gold (the multiple getting larger). If you're a reflationist, though, the safer long bet's on silver.

A couple of factors line up in silver's favor now. Numero Uno: Our monetary inflation indicator's (see: "Explaining Inflation ... Again") found its legs and turned upward after declining for most of 2008. Numero Due: Silver's got its own technical basing going on. For the first time in months, there's some resolve being shown by silver buyers.

London Silver Fixings

So is this the time to buy silver? Perhaps a better time than the recent past.

Many metals lovers, however, have complained of shortage in their local cash markets. For them, we offer our primer on using the wholesale market for retail-sized purchases ("Precious Metals: ‘I Can Get It For You Wholesale'").

For traders, some more silver options will be explored in Tuesday's column.

Comments

[da_rubberba...:]

Beware, commodity index rebalancing ahead
Posted by Izabella Kaminska on Jan 05 15:34.

The major commodity indices rebalance their respective asset weightings once a year (or occasionally more) — and with that comes a mass dose of buying and selling. The 2009 rebalancing is expected to start sometime this week.

Luckily, JP Morgan has produced its best guess of how the 2009 reweightings of the DJ AIGCI and the S&P GSCI indices will impact the market.

The weightings for both indices are released ahead of time, but begin to kick in the first few working days of the new year. In the case of the DJ-AIGCI — which JP Morgan estimates has $25bn in funds tracking it — the new weightings come into force during the roll period that begins January 9th. The S&P GSCI index weightings kick-in after its January roll which commences January 8th. JP Morgan estimates about $50 bn of investment into that index.
As the DJ weighting multipliers account for changes in US dollar-denominated values there is generally more potential for large changes there than in the GSCI, whose weightings are set in terms of ounces/tonnes (on the basis of liquidity and are weighted by their respective world production quantities).

Accordingly, JP Morgan see the most significant change coming in the DJ-AIGCI rebalance. Here the market weight of crude oil is expected to increase from 9.6 per cent to 13.8 per cent, gold from 10.8 per cent to 7.9 per cent, copper (COMEX) from 4.5 per cent to 7.3 per cent, live cattle from 6.4 per cent to 4.3 per cent and sugar from 4.7 per cent to 3.0 per cent. Meanwhile, S&P GSCI crude oil weight will go from 32 per cent to 33.8 per cent. Their analysis:

In financial terms, we expect the rebalancing to have the greatest impact in gold, COMEX copper, crude oil, gold, and live cattle. We estimate that the rebalancing of the two indices is expected to result in $877 million of selling in gold, $699 million of buying in COMEX copper,
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Jan 05 06:44 PM

[Roger Knights:]

Therefore (?) it would make sense to short gold and buy copper.

Jan 05 10:09 PM

[Depressedal...:]

There's talk that WHEN the Second Great Depression is well on its way that our Government under the direction of President Obama/Federal Reserve will repeat the same fiscal policy that Franklin Delano Roosevelt enacted and that was a law enacted to prohibit the ownership of gold by private citizens and that all Americans who owned gold had to relinquish it back to our government. This will be the "gut" policy by the politicians to prohibit ANY chance of a "gold backed currency" and to enlarge the coffers of our government who will have the printing presses running 24/7 which will debase our fiat currency leading to the same debacle of hyperinflation experienced by the Germans during the Weimar Republic! NO currency/economy ever survives through printing money which debases its value as more printed money is in the total money supply of our country. When gold is then sought after by our government......what then will happen to the value of silver? Will silver then be the replacement for gold for barter/legal tender once our fiat currency is worthless?

Jan 06 11:59 AM