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Will Silver Outperform Now or Later?


We need more signals.

The recent huge purchase of gold by the Indian central bank triggered a substantial rally that took gold to new (nominal) highs gathered a lot of attention and generated a substantial rally. I touched on this subject in "Dollar Tops As Precious Metals Bottom", but since this topic is so popular, I'd like to put in additional comments this time, but from a different point of view.

In the following essay, I'd like to comment on the negative impact that future government sales may have on the price of gold. After all, that's a wide-known argument against investing in the precious metals. It's said that gold isn't a good investment because governments and central banks around the world will, at some point, flood the market with their gold reserves and cause a massive plunge in the price of gold and silver (correlated with gold).

Think about it -- governments are institutions, so they can't be "emotional", but it's ultimately an (emotional) individual (or a group of them), who make decisions regarding selling and buying precious metals.

Sounds evident, but the implications aren't that obvious. The higher the price of an investment asset goes up, the more attractive it becomes to buyers, as they project the same pace of growth in the future (by the way, this is the psychological mechanism that causes speculative bubbles). Consequently, when gold rises high (and silver even higher on a relative basis), it wouldn't surprise me to see governments/central banks decide to purchase even more metals.

The key implication here is that often-repeated bearish argument -- monetary authorities will dump their gold on the market, causing a massive plunge in the metals – shouldn't make you overly concerned.

Moving on to the technical situation on the precious metals market, this time I'll provide you with my comments on the silver market.

It was a week ago when I wrote the following:

The reliability of the seasonal tendencies on the silver market is quite amazing -- not only did the top materialize in the mid-September, almost exactly on the day it was predicted, but the price also rose on average up to the point where it was closer to the "bottom" part of the cycle. This pattern currently suggests that the next bottom will be put around the first days of November, which means that we are either behind one already, or are getting very close to it.

It seems that the bottom materialized a few days before the exact date marked with red horizontal line -- thus it was indeed "close to the bottom". The action in the volume is just as positive as it is the case on the gold market, and both the Relative Strength Index (RSI) and Stochastic Indicator are not in the topping area.

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No positions in stocks mentioned.
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