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What Are the Silver to Gold and Platinum to Gold Ratios Indicating?

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Take a look at some technical analysis of gold, silver, and platinum.

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At my firm, we are deeply convinced that the bullish fundamentals for the precious metals market are still in place, and are not easily put off by recent corrections. But how can one tell which asset will outperform the others when the market finally starts to rally strongly? You might have noticed that we quite often use various ratios on our charts – such a technique is called Relative Strength Analysis and helps an analyst tell which of the two assets (or group of assets) is likely to do better in the future. This may be done to compare two particular assets (such as silver:gold ratio) or two groups of assets (such as the general stock market and precious metals stocks – SPX:GDX ratio).

In this essay, we will focus on the three most important precious metals -- gold, silver, and platinum -- and will try to apply the aforementioned technical tool to predict which one of these may bring the highest profits in the near future. It is important, however, to bear in mind that even if one finds the asset that is likely to outperform the others in the same class of assets (such as a particular metal in the precious metals sector, or a particular mining stock among gold and silver stocks) it is still a very good idea to diversify and also include other assets from the same group in your portfolio. Finding the most likely outperformer(s) helps us set the right proportions for our portfolio but diversification is insurance in case we make a mistake or an unlikely event able to thwart our plans occurs.

With the above in mind, let us jump into the technical part of today's essay. We'll begin with gold's long-term chart (charts courtesy of http://stockcharts.com.)


Click to enlarge

We see that prices have moved above the 60-week moving average. The bottom appears to have formed at the level of the April 2012 low. An ABC zigzag correction pattern is in place now and is similar to what was seen at the beginning of 2009 and also in late 2009-2010 (and on multiple other occasions). It seems quite likely at this time that gold's correction has completed.

That's not new information, but it's worth repeating as it's so important: Gold has been correcting for about one and a half years now, which makes one of the longest or the longest (depending on the exact definition) consolidation since the beginning of this bull market. Consolidations are necessary to cool down the optimism and shake "weak hands" out of the market. With analysts and banks lowering their gold price targets for the coming years, it seems that the "necessary sentiment damage" has already been done and that gold can now continue its upward path in tune with its fundamental factors.

Now, let us move on to the silver market and have a look at the white metal's long-term chart.


Click to enlarge

We see that silver's price is above a major long-term support line, and this makes for a bullish picture overall. It is only a bit more bullish than not, however, because silver's price is below two important moving averages, the 10-week and 50-week. If silver just moves a bit higher (above these moving averages), then it is quite likely to rally much more in the weeks that follow, and this is something that we expect to see.
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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