Silver Surges to $18.68/oz - Breakout Above Resistance Could Lead to March 2008 Record High of $20.88/oz
Published in Market Updates Precious Metals Updateon 30 April 2010
Gold
Gold reached new 2010 high in dollars (over $1,175 per ounce) inAsian trading overnight and again Europe this morning (over $1,177 perounce) as investors continue to allocate funds to gold in order tohedge sovereign debt contagion risk.
Gold was marginally lower in dollar terms yesterday but rose sharplyin Asian trading with unusually strong Japanese buying. This buying hascontinued in early European trade. Concerns of a meltdown in Europeandebt markets have abated somewhat but gold’s continuing strength ineuros and other currencies signals that the worst may not be past.
Gold’s slow and steady rise continues and the metal is up some 6% inApril alone. Market sentiment towards gold has definitely shifted andits safe haven asset attributes are now being accepted by even the mostbearish gold analysts. Gold now looks good both fundamentally andtechnically having closed above $1,165/oz and with the trend firmly up,$1,200 per ounce seems quite likely next week.
Click on image to view full size
Silver
Silver surged 2.4% yesterday and traded higher throughout most oftrade in New York, ending near its late session high of $18.56/oz.Silver is up by more than 3% so far in the week and 8% in April. Silverlooks very well technically (see chart above) and is in a rising trendchannel with support at $15 and $16 per ounce. Resistance is between$19.20 and $19.30 per ounce and a close above these levels should seerapid price moves to $20 per ounce. Above that the next level ofresistance is at the March 2008 highs at $20.81 per ounce.
Indeed, it is interesting that after a similar period ofconsolidation in 2006 and 2007 below resistance at $15 per ounce (seechart above), that once resistance was taken out, silver quicklyrallied nearly 50% in less than 3 months (from $14/oz to nearly$21/oz). In recent years, silver has tended to lag gold prior to sharpmoves up after gold has already made significant gains.
Silver Versus Gold Performance - 1970 to Today (Quarterly). Click on image to view full size
The chart above clearly shows how silver is extremely correlatedwith gold. Silver too is a safe haven asset and besides its verysignificant commodity uses it continues to trade like a currency.Despite it being demonetized in recent years, Milton Friedman has saidof silver "The major monetary metal in history is silver, not gold.”Gold and silver both - but silver to a larger extent than gold - havebeen used as money in more regions and countries and for longer periodsof time than the relatively modern use of paper currencies.
Gold’s record high in March 2008 was just over $1,000/oz and todayit is trading at over $1,175/oz. Silver is in effect playing catch upwith gold. Silver remains very undervalued versus gold on a historicalbasis. The chart above shows how silver has underperformed goldhistorically and in recent years.
Gold / Silver Ratio - 1960 to Today (Quarterly). Click on image to view full size
Silver remains very undervalued on a historical basis vis-à-viscommodities, gold and other precious metals. The gold/silver ratioremains favourable to silver at 63 ($1,175/oz divided by $18.63/oz) andthe ratio is falling. The "poor man's gold" remains far from recentrecord highs and long term record (nominal) highs near $50/oz in 1980(see chart below).
Silver could be the surprise outperformer in 2010 as it was in 2009.Silver's industrial uses should mean that the gold/silver ratio willlikely gradually regress to the average in the last 100 hundred years -around 45:1. If the tiny silver market was to see real funds enter it,the ratio could return closer to the historical average of 15:1. Thisoccurred as recently as in 1968 and in 1980 and this time around couldresult in silver surpassing its 1980 nominal high at $50/oz.
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Silver reached $50/oz briefly in 1980 when just one billionaireBunker Hunt (one of a handful of billionaires in the 1970s) attemptedto corner the silver market causing the price to surge (in conjunctionwith many investors seeking to hedge themselves from the stagflation ofthe 1970s). Today there are hundreds of billionaires throughout theworld. A lot of technically orientated analysts, investors and hedgefunds are looking at this figure and as nearly all other asset classesand commodities are at, or have recently reached, all time recordhighs, there is every reason to believe that silver may do likewise inthe coming years.
Silver is priced at some $18.70/oz today. The average nominal priceof silver in 1979 and 1980 was $21.80/oz and $16.39/oz respectively. Intoday’s dollars and adjusted for inflation (government historicallyadjusted CPI) that would equate to an inflation adjusted average priceof some $60/os and $44/os. It is for this reason that we believe silverwill be valued at well over $50/oz in the next 2 to 3 years.
Silver remains very undervalued vis-à-vis gold and remains acontrarian play with little or no media coverage and little or noretail investors having any allocation to silver whatsoever. A closeabove $21/oz could see silver quickly rise to $25 or $30 per ounce.
Platinum Group Metals
Platinum is trading at $1,742/oz and palladium is currently trading at $558/oz. Rhodium is at $2,850/oz.