After Short Term Correction, Silver Should Outperform Gold

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Includes: DZZ, GDX, GLD
by: Tactical Investor

See it big, and keep it simple.

Wilferd A. Peterson

From high to low, silver has dropped over 24%. From high to low, gold has so far shed only roughly 12%. Silver also did not take out its 2008 highs when gold went on to put in a series of new all time highs. This is another massive intra market negative divergence signal and yet another reason to suggest that gold could correct/consolidate for several months. On a positive note, gold has held up remarkably well in the face of a very strong rally from the dollar. If it continues to hold up like this, then when the dollar rally finally fizzles out, one can expect gold to literally explode upwards.

The breakdown in silver could be an early warning signal of what lies in store for gold in the short term time frames. Taking the longer term perspective, this rapid move down in silver indicates that when the next buy signal is generated in the precious metal's sector, that silver will most likely be the top performer. Remember all dogs have their day in the sun. Palladium, the leading dog, clearly illustrated this point as it took the number one spot in the precious metal's sector in terms of performance for the past 12 months; we were strongly pounding the table on this underdog from late 2008 to early 2009.

Click to enlarge:

The above chart clearly illustrates silver's (poor man’s gold) inability to trade to new highs in December and January of this year, while gold surged to put in a series of all time new highs. This is a double negative for not only has silver not even come close to taking out its all time high, but it could not even test or take out the highs it put back in March 2008. Silver moves much faster on a percentage basis than gold does, so this action indicates that something is out of sync in the gold markets. At least, in the short-to-intermediate time frames.

Silver has now become the dog of the precious metal pack and according to the dog theory it will have its day in the sun. When the time is right we will issue a strong buy for this metal. In the short to intermediate time frames though, it would be wise to wait before deploying any new money as silver is indicating that all is not well in this sector.

Note that gold has issued multiple intra market negative divergence signals, if it had issued one only then we would not pay too much attention to this development. Gold, however, has flashed several very strong intra market negative divergence signals, the strongest one was flashed by the dollar; the dollar refused to trade to new lows when gold went to put in a series of new highs. Instead the dollar was actually trading roughly 4% higher from its previous low, when gold put in a new all time high.

Conclusion

In the short to intermediate time frames, the precious metal's sector is still expected to correct/consolidate. Gold, however has held up remarkably well in the face of a strong dollar. Given the strength of the dollar one would have expected gold to have pulled back a lot more than it has done so far. If this pattern in gold persists then it very strongly indicates that once this rally in the dollar comes to end, gold is going to literally explode upwards. On a percentage basis though silver is expected to perform a lot better than gold in the next leg up.

Traders with a short term perspective can use strong rallies to open up short positions via DZZ.

Longer term traders can use strong pull backs to open up long positions via GLD and GDX.

All charts were provided courtesy of www.prophet.net

Disclosure: We have positions in DZZ