Although there is not yet an ETF that tracks gold and silver prices, I wanted to post my thoughts on something interesting that I noticed last week.
As many of you know, I have personally been bullish on not only gold and silver mining stocks over the past several months, but also gold and silver bullion itself. In case you are not aware, Gold futures corrected last week from a high of $428, down to $407 per ounce, before finding support just above its 50-day MA and bouncing to close over $412 yesterday. Given the large gains in spot gold, the correction was not surprising and was actually healthy for the precious metals markets. While gold was correcting last week, I noticed that the Silver futures were NOT correcting at nearly the same percentage basis as gold. Upon further examination of the two charts, I also noticed that Silver had rallied a much higher percentage than Gold during the metals' most recent upward move. This means that Silver, which traders seemingly had forgotten about, has begun to show relative strength to the price of Gold.
One clear example of the relative strength of silver can be found by taking the spot price of gold and dividing it by the price of silver. If you did this calculation on December 1 of 2003, one ounce of gold would have bought you 73.8 ounces of silver ($403.80 divided by $5.47). But, based on the price relationship of gold and silver on December 31, that same ounce of gold would only buy you 69.6 ounces of silver ($416.10 divided by $5.96). To put these numbers in perspective, consider the price relationship between the two metals during their major bull peak in January of 1980. As of January 31, 1980, gold futures were trading at a whopping $1,297 per ounce and silver was trading at $49 per ounce, meaning the gold/silver ratio was only at 26. While I am not implying that the ratio will drop that low, it is something to think about. According to my rough estimation, the historical relationship between gold and silver is somewhere in the 40s. As of yesterday's close, which factors in last week's price correction in both markets, the ratio is now down to 65.3 ounces of silver per ounce of gold.
Even though you may not trade gold and silver futures, this divergence is important to know because it tells us that the risk/reward of trading the mining stocks may favor those that concentrate on silver mining rather than gold mining, at least in the short-term. Instead of stocks like NEM, PDG, and ABX, you may want to research and consider silver mining stocks such as CDE, SSRI, and SIL, just to name a few. We bought CDE for a swing trade in our Real-Time Room yesterday and I have also personally bought more silver coins and bullion, while keeping my gold investment at the same level. Take this analysis for what it's worth; hopefully some of you may benefit.
