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Silver and Gold Melt-Up Over or Pausing?


Silver and gold may look ready to fold, but it may be better to be bold.

Everything has its limit -- iron ore cannot be educated into gold.
-- Mark Twain

Gold and silver have been on a tear since late June following dovish Bernanke comments, with an acceleration taking place in August. I was quite bullish on precious metals, calling for a gold melt-up on August 2. Gold performed well, but silver had the most oomph as it strongly outperformed.

Silver is often referred to as the "poor man's gold" and tends to be more volatile than the yellow metal, with it directionally correlated to gold's trend. When silver outperforms gold, that tends to coincide with bullish hopes on industrial output on the global front. So strength should come as no surprise, given better-than-expected China data and a re-evaluation of the emerging market (NYSEARCA:EEM) "crisis," which is anything but. Recent price action has been a bit choppy, so it is worth asking: Is the silver and gold melt-up over?

Take a look below at the price ratio of the iShares Silver Trust ETF (NYSEARCA:SLV) relative to the SPDR Gold Trust ETF (NYSEARCA:GLD). As a reminder, a rising price ratio means the numerator/SLV is outperforming (up more/down less) the denominator/GLD.

Note that the ratio appears to be sidelining a bit here into the taper despite some very significant and recent excitement over emerging markets (the "next fat pitch"). The trend still looks favorable, and I suspect that directionally gold's up move will only really be over if silver badly underperforms and the recent emerging market strength was a headfake. So while the pace of the advance in precious metals may subside, bets on a return to negative real rates may continue, given the steepness of the yield curve and a still dovish central bank. We may see gold and Treasuries correlate in the weeks ahead as both get a bid. For the melt-up camp, you have logic on your side.

Twitter: @pensionpartners
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