Silver Market Update
Originally published October 19th, 2008.
Silver may be classed as a "Precious Metal" but it has certainly not received any special treatment these past few months, during which it has been sold down heavily along with most other commodities, in marked contrast to gold, which has held up well.
We can see this at a glance by comparing the long-term charts for silver and the commodities index, which are stacked one above the other below for direct comparison. These charts make it abundantly clear that as far as the markets are concerned, silver is just another commodity. We had observed this weakness compared to gold a long time back hence our gravitating more towards gold. What useful conclusions can we draw from this for the future? In the first place we might want to reconsider whether silver should still be classified as a Precious Metal at all. In the old days, when wild-eyed guys with long matted hair used to hand over silver coins in the woods for hunks of salted meat, it certainly was, but its recent performance makes clear that its role as an industrial metal is, at least for now, its dominant one and it is being dumped along with base metals. The main conclusion of course, is that gold investments should be favored over silver at this time, although it should be kept in mind that silver comes alive and really performs well towards the end of gold uptrends, at which times it is often advantageous to rotate out of gold and into silver. It is because silver is often a by-product of base metal production that big silver stocks have been terrible investments for a long time and should continue to be avoided. The small silver stocks that are pure silver plays are much more interesting and some of the stocks of those companies which do not fail over the next year or so could end up being exciting and highly profitable investments. We will of course remain on the lookout for these and for signs of a reversal of fortune for the sector.
On the silver chart we can see that while it continues to weaken it is now approaching strong support in the $8 area, which is likely to generate, at the least, a sizeable bounce. If The Grand Rescue Plan, described in the Gold Market update, goes ahead then there is a good chance that we will soon see a major reversal in commodities as the bright prospect of rampant inflation and possibly hyperinflation lights another fire under commodity prices. On the silver chart we can see that the most likely point at which a major reversal is likely to occur is the $8 area. Again as described in the Gold Market update, a guide to the timing of such a reversal is likely to be provided by the dollar, which should then break down from its current strong uptrend.
Now compare the long-term gold chart to that for silver - as we can see it looks much healthier.