Silver may have had its day in the sun. It's time to invest in gold and back off of silver, because the latter is more likely to go lower.
On April 27, I recommended that investors take steps to
. The article appeared one day before the top.
Investors who bought the October $40 puts on the iShares Silver Trust (NYSE:
), as I suggested, nearly tripled their money in two weeks … now I’m back with a new idea.
That ETF holds 9,500 metric tons of silver or 306.5 million ounces. That’s equal to more than one-third of worldwide fabrication demand in 2010 and nearly half of all the silver mined in 2009. And those levels are down from when the ETF was at its peak in April, when it held over 11,000 metric tons.
The argument could be made that:
But that was then. This is now.
What’s the play on silver today?
I’m still no Jake LaMotta (Robert De Niro in ) on silver. But I’m not a precious metals bear, either. The trade I like right now is to buy gold and short silver.
If our politicians continue to play partisan politics over the next few weeks and investors worry that
, you should see demand for gold increase. While that doesn’t necessarily mean a decrease in demand for silver, I’d expect gold to be the dominant metal in that scenario.
While some investors think of both gold and silver as safe havens during times of panic, many more simply think of gold.
Additionally, during the financial collapse in 2008, gold and silver tanked along with all other assets. When they did, gold held up much better than silver, falling 29% peak-to-trough while silver slid 59%.
Furthermore, once both metals rebounded, gold actually finished 2009 higher than its 2008 peak, while silver was still 5% below. It wasn’t until things had calmed down in 2010, that silver went parabolic.
) is only a few points away from its high and looks to be trying to get back above the trend line. It’s had higher lows and after the last low it bounced right back
a sign of strength.
So in other words, a financial instrument — not real demand — was responsible for much of the increase in the price of silver.Fundamentals and Technicals Point Towards Buying Gold and Shorting Silver Fundamentalsthe debt ceiling won’t be raisedTechnicalsThe SPDR Gold TrustGLD—
Silver, on the other hand, isn’t nearly as strong. After the large drop in late April and early May, the ETF has tread water. Furthermore, the 50-day moving average is curving lower, which is never a good sign. In the past few months, SLV has attempted to climb above the 50-day moving average and failed.
Since June, SLV has been making lower highs and lower lows, another bearish sign.
Lastly, look at how gold and silver are performing relative to each other. For over 10 years, gold and silver pretty much moved in tandem, with the occasional significant outperformance by one or the other. You can see that each time outperformance became meaningful the two metals usually got back into sync relatively soon or even switched places.
Gold and Silver: A 10-Year In-Sync Precious Metal Duo
But then looked what happened starting in late 2010. Silver went parabolic, not only in price, but also relative to gold.
If the past is any guide, the performance of gold and silver should return to their historical relationship. Perhaps gold simply catches up to silver. But given
, I’d expect them to meet halfway, with gold continuing to rise and silver continuing to fall.
For investors who want more gold in their portfolios, but don’t want to be too heavily weighted towards precious metals, long gold/short silver is a good hedge that should provide positive results.
And even if I’m wrong about silver going lower, gold looks like it should outperform silver, providing investors upside to any rise in the metals while lowering the risk of being overly exposed.
Marc is a senior analyst at
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