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Gold and silver charts look horrible, as the two metals break the one technical resistance level after another, dragging along popular ETFs, trading below their 50, 100, and 200 moving averages. At around 11.15 am, iShares Silver Trust (NYSEARCA:SLV) was down near 5 percent in the last five days, while SPDR Gold Shares (NYSEARCA:GLD) was down 3.8 percent to a 10-month low. And all this in spite of an escalation of conflict between North and South Korea, and an overall decline in equity markets.


(Click to enlarge)


(Click to enlarge)

Major Precious Metals ETFs / Stocks as of 11.15

ETF

1-day Performance (%)

3-Month Performance (%)

6-Month Performance (%)

SPDR Gold Shares (GLD)

-3.80

-3.65

-3.69

iShares Silver Trust (SLV)

-4.91

-4.76

-4.79

Freeport-McMoRan Copper and Gold (NYSE:FCX)

-2.38

-2.35

-2.32

What is propelling today's decline?

Two things. First, news that the Central Bank of Cyprus is selling a big chunk of its gold reserves to pay for its on-going bailout program, which ignited fears that other European countries may follow suit, especially Italy, a big holder of gold reserves.

Second, weak U.S. macroeconomic data, a big drop in Producer Price Index, and weak retail sales and consumer confidence, a bearish sign, especially for silver, an economic sensitive metal. Does it mean that the precious metals rally is over? Should investors avoid precious metals altogether, or even go short?

As it was discussed in a previous piece , investors should avoid buying commodities, as a fast run-up and weak fundamentals make this sort of trade exceptionally crowded and risky. But aggressive investors may want to short gold and silver, as they both are sensitive to a strengthening dollar, a change in monetary policy, and a weakening global economy. Gold is further sensitive to central bank sales.

But when the two investment positions are compared, the silver short position is a better bet, for three reasons:

1. Price appreciation. Since 2009, silver has appreciated 350 percent, while gold has appreciated by 100 percent only. For the year, silver is up 80 percent and gold is up 23 percent. Since both commodities are purchased as precious metals, standard economic theory suggests that when the price of a commodity rises faster than substitutes, buyers reach for the substitutes.

2. The silver-gold anomaly. For almost a decade, silver has been rising at the same or at a slower pace than gold. In 20111, however, the two metals have reversed fortunes, as silver rose by leaps and bounds. And even after the recent correction, silver's growth remains above that of gold-though the gap has closed slightly in the last twelve months. If the price pattern is to reverse to the norm, the price of silver must drop substantially.

3. Silver is more of an industrial material than gold. Therefore, it is more sensitive to a weakening economy that may be in the cards after the end of QE in the U.S., as unemployment heads towards the natural rate of 6.6 percent.

Source: Gold And Silver Break Several Technical Barriers, What's Next?