The price of silver reached a five-month high this past week as investor interest seems to have been rekindled in both gold and silver as belief that the latest round of monetary easing from the Federal Reserve – QE3 – will soon be on its way. Many investors had largely stayed away from silver in recent months after some had gotten caught up in its volatility. Silver had touched a 30-year high in April 2011 before plunging 35% in a few short weeks.
Now the volatility is back – but on the upside – as prices have climbed more than 20% in less than a month. The gains have outpaced that of gold, which rose roughly 10% during the same time frame. Importantly for investors, the ratio between the two precious metals has moved about 10% in silver’s favor since mid-August. This is the first time silver has outperformed gold since the start of 2012.
For non-futures investors, the two precious metals can easily be tracked through the use of exchange traded funds (ETFs). The most liquid ETFs for the two precious metals are the iShares Silver Trust
(SLV) and the SPDR Gold Shares
You can take a look at my long term outlook analysis from last week in Don't Look for the Gold Standard to Be Reinstated
Some may wonder why silver has outperformed gold in the past several weeks. The answer goes deeper than just confidence that QE3 is coming soon, but it is still rather a simple one. The sharp rally in silver was fueled largely by short-covering. That is, some investors (hedge funds, etc.) had made rather large bets that silver would continue falling and were caught off-guard by its recent rise. According to data from the Commodities Futures Trading Commission, the silver market during the week of August 27-31 saw the largest amount of short-covering since May 2011. At the same time, Bloomberg reported that hedge funds were the least bullish on silver in almost four years.
It is unknown how long silver will outperform gold. But even some long-term fundamental investors, such as legendary commodities investor Jim Rogers, have said that they believe silver right now is a better investment than gold. Rogers points to the fact that historically gold has been worth about 12 to 15 times what silver is worth, but that recently it has been worth roughly 50 times silver’s value. Silver is also the only major commodity not to have reached a new all-time high in the decade-long commodity bull market and is still cheaper than it was 32 years ago.
Silver may be worth a look, but since it is so volatile, wait for a downward spike before initiating or adding to a long position.
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
No positions in stocks mentioned.
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