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Silver's Final Bottom Is Not Yet In

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Silver has been underperforming recently, but not as extremely as is usually expected during a major bottom.

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Let us now move on to the short-term timeframe.



Here, in the short-term iShares Silver Trust ETF (NYSEARCA:SLV) chart, the underperformance of silver is very clearly visible. While there has been some sideways trading, prices have declined overall, and the lack of any real pullback indicates the overall weakness of this market at the present time.

Given Thursday's close in the SLV ETF at $23.49 (silver at $24.30), we still see no significant change in silver's performance – its correction is still very small compared to the one seen in gold.

Since silver's underperformance is such an important issue at this time, we decided to examine it particularly closely, using silver-to-gold ratio.


Click to enlarge

In today's silver to gold ratio chart, we present a somewhat new view of this ratio. We've discussed the underperformance of silver for some time now so we felt this graphic would be useful. We believe it's best to plot the rate-of-change indicator (ROC) on this ratio as it does a very good job at measuring sharpness of given moves. The solid line in the chart is the ratio itself with gold's daily price in the background and represented by the gold line.

The key point here is this: major bottoms used to be preceded by a sharp drop in the silver to gold ratio. We used to see either capitulation of silver investors or artificial sell-offs before the declines were over. Regardless of what the reasons were, it's something that used to happen before the bottom was truly in. Recently, however, we saw silver's price decline, but not as sharp as expected relative to gold if a major bottom was forming. In the recent days, we have seen steady underperformance rather than a very sharp drop in the ratio. It looks on the chart like the trend is accelerating, though, sort of like a reversing parabola.

Ideally, we'd like to see a lower rate-of-change indicator, say -10 or -15 at least before stating that the final bottom is in. This indicator barely moved when the precious metals declined heavily earlier this month. The declines seen in 2008 and in the first 2 months of 2010 provide a good example of what the indicator can do. At first, metals declined but silver not as significantly as gold. Only when gold formed a major bottom, did the ratio decline sharply. We would like to see this confirmation also in case of the current decline.

Summing up, silver has been underperforming recently, but not as extremely as we would expect during a major bottom. It seems therefore that the final bottom is still ahead of us. Thursday's move to $24.30 doesn't invalidate the above.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
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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