After the latest meeting minutes from the U.S. Federal Reserve were released, commodities rallied and some of the most surprising moves were seen in the precious metals space. The bear declines in gold, silver, and copper have been some of the most well-documented stories in the market this year, but these latest moves have been strong on a short term basis, and have led some sections of the market to surmise that a turning point might be in place. But is it time to start buying gold or silver? Is one option better than the other? Or should we avoid metals markets altogether?
The bear declines in metals are shown clearly in the sector's funds. These span across the board, but key examples can be found in the iPath Dow Jones UBS Copper Total Return Sub-Index (JJC), the iShares Silver Trust (SLV), and the SPDR Gold Shares Fund (GLD). year-to-date, the larger declines have declines have been seen in gold and silver, but the latter is down by a massive 33% for the period. Those looking for contrarian reasons to buy silver or gold might cite the broader economic environment, as central bank stimulus will lead some to point to these metals as an inflationary hedge against what could be a declining U.S. dollar, or as a safe-haven asset for instances where market turbulence is seen. A similar case could even be made in a positive economic environment, as global strength would generate increased demand in these metals.
But, for contrarians bullish on the sector, which metal is the best choice? Most investors are looking to choose between gold and silver, but since gold has no true end market (given its position as a vehicle for investment), it makes much more sense to move toward silver, given its similar position as a safe-haven asset and its extensive usage in industrial manufacturing. silver plays a key role as a component in many common products. Examples include batteries, automobiles, solar panels, and general electronics items. gold investors cannot make a similar claim, and given the relative valuation weakness seen in silver (which is having one its worst yearly performances in almost 30 years), much better opportunities can be found.
Year-to-date declines in GLD are now seen at more than 22%, and this includes the short term rallies seen this week. But, at this stage, there is little in the way of near term resistance until prices hit the 61.8% Fib retracement of the rally from $66, which suggest further declines are in store.
Year-to-date declines in SLV are much larger, with prices now lower by over 33% during the period. These moves have sent prices to their current levels, at 78.6% Fib support of its rally over the same period. This suggests that the latest rally can form a bottom, as long as these support levels hold.
As a comparative example, copper prices have sent the iPath Dow Jones UBS Copper Total Return Sub-Index has seen declines of only 13% over the same period. Prices have yet to test key Fib support, so there is little to suggest prices will bounce near-term.
Overall, the picture painted of a silver market that can find bullish traction in multiple market environments (both positive and negative), and is highly oversold relative to its peers. This week's moves suggest changes in market sentiment and this will lead to arguments that silver is starting to find a supportive bottoming in prices. For those looking for alternatives to direct buys in silver, instruments like Silver Wheaton Corp. (SLW) can also be used. This company has important advantages over many of the silver miners, with comparatively strong margins and the ability to purchase products from miners at reduced prices. This insulation provides protection for the company when dealing with industry risks, and presents some interesting alternatives for those looking to take contrarian positions in silver.