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Silver to Outshine Glittering Gold in the Long (!) Term

Based on the May 13th, 2011 Premium Update. Visit our archives for more gold & silver analysis.


 

Increased volatility seen in silver market in the recent past has reflected in market sentiments, and no wonder that we have received many questions about silver fundamentals and the COMEX margin requirement hike. For those of you who are concerned with the possible deterioration in silver's fundamentals (and long-term targets), here's a quote of someone in the business.

Panic is what I see in the people wanting to buy silver. Gold buyers are few in number with silver being the main play. Some people wanting to buy silver-coin instead of one ounce rounds and 10 ounce bars. There is a keen sense of despair that the dollar will collapse among silver buyers. Diamonds are not in demand as they were in 1979-80. Rare coins were also high on the list of peddlers taking advantage of people who knew nothing about coin investments. A lot of people during the Carter administration took advantage of the high interest rates the banks were offering. Interest rates as high as 17%. We were deluged with people selling sterling silver flat ware and hollow ware causing a back up in the smelting process. This drop in the silver price will probably be good for silver because it will give the silver stream a chance to clear up.

Talking about margin requirements, rising margin requirements are natural when prices are growing and are needed for the margin to stay in the same range percentage-wise (about 6% - 8% for silver). Yes, an increase in the margin is something bearish for the short-term (and, as we've seen, can be the spark that ignites a decline), but unless the margin really increases percentage-wise (!) it doesn't change anything from the long-term perspective.

Overall, the long-term situation is still favorable and silver is very likely witness fresh highs - however not necessarily right away. With so much happening in precious metals markets, let's turn to the technical part. We will start with silver chart (charts courtesy by http://stockcharts.com.)

In the chart below, we can see that silver has moved to one of the long-term support levels. Although silver's price did move up and down erratically towards the end of the previous week, a corrective rally seems to be quite likely from here.

Chart 1

Zooming in for a closer look at silver's very long-term trends (if you're reading this essay on our gold investment website, please click on the chart to enlarge it), we can see that when silver corrected its decline, it did so above the 50-day moving average (green line on the chart). This level was touched only briefly but silver didn't move above it. Still that's not the most important thing that we see on this chart.

The more important thing is the time. Please note that in the past silver's price has moved above the 50-day moving average more than once after the first part of the decline. This trend was seen in 2006 and 2008 and in both years, a bigger move to the upside was seen in the weeks following the decline. The implications here are that silver is still likely to move higher in the short term before the decline continues.

Based on the recent performance of the white metal, we have slightly adjusted our targets for this decline. Obviously, this indicates that more declines are coming in the price of the white metal in the medium-term. Still, analysis of the long-term chart suggests that a turnaround is clearly possible and the Silver:Gold ratio also suggests that this is quite likely.

$SILVER:$GOLD Index

In the Silver:Gold Ratio chart, we see that the ratio is right at the lower border of the rising trend channel. Although the decline from the top of the channel to the bottom was sharp and rapid, it stopped at the support line, which leads us to believe that a short-term rally (a bounce) from here is quite likely.

Moving on, let's have a look at long-term gold chart.

$GOLD Index

In the very long-term chart, gold continues to gives us some indications that the medium-term trend now appears to be down. The yellow metal did not move above the rising trend channel. No breakout was seen in the small rally. Although gold will have what appear to be a final chance to break out in the near-term, this does not appear very likely.

Let's see how the above analysis fits into the current seasonal trends.

True Seasonals

What we see above is definitely bullish in the short term. Please ignore the legend on the left side of the chart and focus on the red line on the chart representing the price of gold. Averaging gold's performance in previous Mays and taking into account the derivatives whose expiry date is closest to where we are today (stock options in this case) allows us to see that we are most likely in the corrective stage of the decline. This is precisely what the previous analysis suggests, so the odds of it being correct are quite high.

Consequently, the medium term does indeed look bearish for the yellow metal but there appears to be a bit of life left in the slight correction (rally) within this downtrend.

Summing up, it seems that the precious metals could rally for several days / weeks and then resume their decline. The short-term situation for silver looks somewhat less bullish than gold does, however from the long-term perspective (few years) we are still likely to see silver outperforming gold just like it did before the beginning of this month.

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Thank you for reading. Have a great and profitable week!

 

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