Will Silver Outperform Immediately or Do We Need to Wait a Little Longer?

This essay is based on the Premium Update posted November 6th, 2009

The recent huge purchase of gold by the Indian central bank triggered a substantial rally that took gold to new (nominal - !) highs gathered a lot of attention and generated a substantial rally. I’ve touched this subject in my previous essay, but since this topic is so popular, I would like to put additional comments this time, but from a different point of view. In the following essay I would like to comment on the negative impact that the future government sales may have on the price of gold. After all, that is a wide-known argument against investing in the precious metals. It is said that gold is not a good investment, because governments and central banks around the world will at some point flood the market with their gold reserves and thus cause a massive plunge in the price of gold and silver (correlated with gold).

Think about it – governments are institutions, so they cannot be “emotional”, but it is ultimately an (emotional) individual (or a group of them), who make decisions regarding selling and buying precious metals. Sounds evident, but the implications are not that obvious. The more price of an investment asset goes up, the more attractive it becomes to buyers, as they project the same pace of growth in the future (by the way, this is the psychological mechanism that causes speculative bubbles). Consequently, when gold rises high (and silver even higher on a relative basis), it would not surprise me to see governments / central banks decide to purchase even more metals. The key implication here is that often repeated bearish argument - that monetary authorities will dump their gold on the market thus causing massive plunge in the metals – should not make you overly concerned.

Moving on to the technical situation on the precious metals market, this time I will provide you with my comments on the silver market (courtesy of http://stockcharts.com).

It was a week ago when I wrote the following:

The reliability of the seasonal tendencies on the silver market is quite amazing - not only did the top materialize in the mid-September, almost exactly on the day it was predicted, but the price also rose on average up to the point where it was closer to the "bottom" part of the cycle. This pattern currently suggests that the next bottom will be put around the first days of November, which means that we are either behind one already, or are getting very close to it.

It seems that the bottom materialized a few days before the exact date marked with red horizontal line – thus it was indeed “close to the bottom”. The action in the volume is just as positive as it is the case on the gold market, and both: RSI and Stochastic Indicator are not in the topping area. Several silver stocks are lagging their underlying metal but it seems that this is a temporary reaction to the weakness in the general stock market. Therefore, we will need to wait for a decisive action in either direction in the general stocks market, before making final calls here. For now, it seems that a sell-off in the main stock indices would cause the rally in silver and silver stocks to be weaker. Speaking of the main stock indices, please take a look at the chart below.

The SPY ETF (proxy for the general stock market, which allows me to analyze the volume) has failed to move above any of the rising trend lines. Moreover, the volume has been visibly high during the late-October decline, and relatively low during yesterday’s rally. The Relative Strength Index appears to have formed a bottom, but that is the only thing that is bullish on the above chart – too little to make me state that a decent rally from here is the most probable outcome.

Additionally, several other main stock indices do not confirm this week’s upswing in the U.S. stocks. As you may see on the above chart, I’ve marked the performance of other stock indices (Nikkei, DAX, FTSE, TSX, HSI) using the semi-transparent lines. Clearly, the action in these indices does not confirm the rally in the SPY ETF.

Don’t get me wrong, I’m not suggesting that we are not going higher – it is possible, especially since the general stock market has been rallying so far this week (not visible on the chart). What I’m saying is that unless we move at least above the thin resistance line, lower values of the general stock market are likely.

Summing up, the fact that governments and central banks are buying precious metals is bullish, not the other way around. The short-term situation on the metals market is also favorable, although much – especially in case of silver and PM stocks - depends on the general stock market and the USD Index. The former had been rallying recently, but it finally topped and moved once again lower as indicated earlier - once it moves below its long-term support level, it’s likely to plunge. The situation on the general stock market remains mixed. Consequently, we will need to wait for additional signals to estimate if silver is likely to outperform gold in the near future, or will we need to wait a little longer.

Disclosure: I own gold and silver.

Comments

[doubleguns:]

I think all of the central banks have realized the weakness in fiat to include the US dollar. They now see the mistake that gold is a relic mentality has caused. I don't expect them to sell their gold. They now understand the "insurance" value of holding gold.

Now if we could just get them to hold silver too!!!

Nov 11 08:57 AM

[Gold Miner:]

The question is "when" not "if" silver will take off. I follow Ted Butler weekly with Eric King.
kingworldnews.com/...
When the rush takes place where holders of their paper silver tries to take delivery you will finally see the correction in gold to silver ratio.
The comex continues to sell contracts of silver where there is not enough to deliver.
I hold physical silver. Last count 34,500 ounces of the Silver American Eagle. From 1986 all the way through 2009. Tulving.com is best bang for the buck. $1.70 over spot and free overnight shipping. Beats the $2.50 over spot premiums mom and pop shop charges.
I also hold physical gold. I buy on average 10 ounces a month. Everything from Gold american eagle in the proof series from the mint to canadian maple leaf. Back in 86 I was paying about $360 ounce. These coins are fetching $1800 and better today. Last count I hold 2745 ounces of physical gold.
My dad got me coin collecting when I was 14 years old. I have been collecting coins all my life. He left me his collection and he inherited his fathers collection of gold and silver coins. I love to watch the feeding frenzy when the metals go up in price. As long as the Fed continues to print money one should consider preserving one's wealth by securing gold and or silver with his fiat currency. This thing will continue for years to come. My dad always said "history will repeat itself" and so far he was right. This thing on wall street and what's going on in the real world will come to a head before long.

Nov 11 09:13 AM

[bmartasin:]

Holy crap where does one store 34,000 oz (2,100 lbs) of silver???


On Nov 11 09:13 AM Gold Miner wrote:

> The question is "when" not "if" silver will take off. I follow Ted
> Butler weekly with Eric King.
> kingworldnews.com/...
> When the rush takes place where holders of their paper silver tries
> to take delivery you will finally see the correction in gold to silver
> ratio.
> The comex continues to sell contracts of silver where there is not
> enough to deliver.
> I hold physical silver. Last count 34,500 ounces of the Silver American
> Eagle. From 1986 all the way through 2009. Tulving.com is best bang
> for the buck. $1.70 over spot and free overnight shipping. Beats
> the $2.50 over spot premiums mom and pop shop charges.
> I also hold physical gold. I buy on average 10 ounces a month. Everything
> from Gold american eagle in the proof series from the mint to canadian
> maple leaf. Back in 86 I was paying about $360 ounce. These coins
> are fetching $1800 and better today. Last count I hold 2745 ounces
> of physical gold.
> My dad got me coin collecting when I was 14 years old. I have been
> collecting coins all my life. He left me his collection and he inherited
> his fathers collection of gold and silver coins. I love to watch
> the feeding frenzy when the metals go up in price. As long as the
> Fed continues to print money one should consider preserving one's
> wealth by securing gold and or silver with his fiat currency. This
> thing will continue for years to come. My dad always said "history
> will repeat itself" and so far he was right. This thing on wall street
> and what's going on in the real world will come to a head before
> long.

Nov 11 11:00 AM

[User 280004:]

How do I find tulving.com ? won`t come up on my search!


On Nov 11 09:13 AM Gold Miner wrote:

> The question is "when" not "if" silver will take off. I follow Ted
> Butler weekly with Eric King.
> kingworldnews.com/...
> When the rush takes place where holders of their paper silver tries
> to take delivery you will finally see the correction in gold to silver
> ratio.
> The comex continues to sell contracts of silver where there is not
> enough to deliver.
> I hold physical silver. Last count 34,500 ounces of the Silver American
> Eagle. From 1986 all the way through 2009. Tulving.com is best bang
> for the buck. $1.70 over spot and free overnight shipping. Beats
> the $2.50 over spot premiums mom and pop shop charges.
> I also hold physical gold. I buy on average 10 ounces a month. Everything
> from Gold american eagle in the proof series from the mint to canadian
> maple leaf. Back in 86 I was paying about $360 ounce. These coins
> are fetching $1800 and better today. Last count I hold 2745 ounces
> of physical gold.
> My dad got me coin collecting when I was 14 years old. I have been
> collecting coins all my life. He left me his collection and he inherited
> his fathers collection of gold and silver coins. I love to watch
> the feeding frenzy when the metals go up in price. As long as the
> Fed continues to print money one should consider preserving one's
> wealth by securing gold and or silver with his fiat currency. This
> thing will continue for years to come. My dad always said "history
> will repeat itself" and so far he was right. This thing on wall street
> and what's going on in the real world will come to a head before
> long.

Nov 11 01:00 PM

[Gold Miner:]

Walk in cold storage with vault door. Works great!!


On Nov 11 11:00 AM bmartasin wrote:

> Holy crap where does one store 34,000 oz (2,100 lbs) of silver???
>

Nov 12 04:18 PM

[Gold Miner:]

tulving.com/

On Nov 11 01:00 PM User 280004 wrote:

> How do I find tulving.com ? won`t come up on my search!

Nov 12 04:19 PM

[sunflower 101:]

Your my hero. Good for you to have been such a good friend to metal. Sounds like it is in your blood. Thanks for haring your story and being such a good example for the current times. I did check out your favorite sales site, but their minimums were too hefty for me. - Thanks again.


On Nov 11 09:13 AM Gold Miner wrote:

> The question is "when" not "if" silver will take off. I follow Ted
> Butler weekly with Eric King.
> kingworldnews.com/...
> When the rush takes place where holders of their paper silver tries
> to take delivery you will finally see the correction in gold to silver
> ratio.
> The comex continues to sell contracts of silver where there is not
> enough to deliver.
> I hold physical silver. Last count 34,500 ounces of the Silver American
> Eagle. From 1986 all the way through 2009. Tulving.com is best bang
> for the buck. $1.70 over spot and free overnight shipping. Beats
> the $2.50 over spot premiums mom and pop shop charges.
> I also hold physical gold. I buy on average 10 ounces a month. Everything
> from Gold american eagle in the proof series from the mint to canadian
> maple leaf. Back in 86 I was paying about $360 ounce. These coins
> are fetching $1800 and better today. Last count I hold 2745 ounces
> of physical gold.
> My dad got me coin collecting when I was 14 years old. I have been
> collecting coins all my life. He left me his collection and he inherited
> his fathers collection of gold and silver coins. I love to watch
> the feeding frenzy when the metals go up in price. As long as the
> Fed continues to print money one should consider preserving one's
> wealth by securing gold and or silver with his fiat currency. This
> thing will continue for years to come. My dad always said "history
> will repeat itself" and so far he was right. This thing on wall street
> and what's going on in the real world will come to a head before
> long.

Nov 15 08:23 PM