Will Gold’s Historic Bull Run Spill Over Into Silver?

Fundamentals

The Silver market is definitely playing second fiddle to its more glamorous “yellow metal ” cousin, as nearby Silver futures have not even reached yearly highs, while Gold continues to move into uncharted price territory. One of the possible reasons why Silver has not garnered the same attention as Gold may be due to its usage as an industrial metal. Despite signs that the worst of the recession may be behind us, we have only started to see improvements in industrial demand for Silver. Until demand really ramps-up, a significant market segment remains reluctant to bid-up prices to obtain supplies. The media’s fixation with Gold’s move to all-time highs has spurred interest by the public at large into Gold as an alternative investment to equities and bonds, with memories fresh to the steep stock market sell-off we saw earlier in the year. Silver prices, meanwhile, are still well off historic highs made back in the first quarter of 1980, when a short squeeze saw prices run-up to almost $50 per ounce! It certainly appears that the old market adage “buy low and sell high” is not how the public invests, but “buy high and try to sell even higher ” might be more appropriate! One indicator metals traders look to for the comparative value of Gold vs. Silver is the Gold-Silver ratio. This ratio measures how many ounces of Silver it takes to buy one ounce of Gold. As of this writing, the Gold-Silver ratio was trading around 62.5, in other words 62 ½ ounces of Silver needed to buy one ounce of Gold. Although this is historically a rather high ratio, it is currently in the middle of the recent range between 45 and 85 that we have seen the past few years. It may take a move to the high end of the ratio before “value” traders start to embrace Silver as an alternative to Gold.

Trading Ideas

Some traders who expect Silver prices to continue to move higher but want to minimize the maximum risk on the trade may wish to look at strategies involving Silver options. An example of one such strategy would be buying a bull call spread, such as the March Silver 20 call and selling a March Silver 25 call. With March Silver trading at 17.51 as of this writing, this spread could be bought for 57.5 cents, or $2,875 per spread, not including commissions. The premium paid is the maximum risk on the trade, with a potential profit of $25,000 minus the premium paid should March Silver be trading above 25.00 at option expiration in February.

Technicals

Looking at the daily chart for December Silver, we notice the market continuing to hover near the 20-day moving average. We appear to be in the midst of a consolidation phase, as prices have moved within a $2.50 range since September. Though the major trend favors the bull camp, we do notice a significant bearish divergence in the 14-day RSI, which failed by a wide amount to make a new high reading when the Futures did on October 14th. Though this is a potentially bearish signal, the uptrend would not be negated until we see a daily close below the uptrend line formed from the November 2008 lows currently near the 14.35 area, or just over

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