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Get Ready for the Silver Breakout
Everybody is talking about gold. Gold this and gold that. It’s hardly surprising. After trading down to $1,525 at the end of May, gold exploded the following week by almost $100. Earlier this month, I wrote that the yellow precious metal was a screaming buy – and, even though it’s slipped back a little since then, it still is.
All signals are pointing higher for this ultimate reserve currency. In my view, gold will push through $2,000 an ounce by the end of the year.
But, as all savvy sovereign investors know, the best opportunities are usually found in places where the crowd is paying least attention.
In other words, don’t forget about gold’s little brother – silver.
Silver Has a Dual Role
Silver is both a precious metal and an industrial metal. Increasing global use of cell phones and computers has sparked greater demand for silver. Gold’s little brother has a number of other industrial uses as well, as it has a high resistance to heat and the highest electrical conductivity of any element.
In terms of market value, silver is highly sensitive to economic downturns, where it tends to follow commodities like copper and other base metal prices.
Silver is poor man’s gold. If gold is the ultimate reserve currency than silver is the change – the quarters, dimes, nickels and pennies.
Throughout history, silver has had a role as a means of exchange or a currency. During the days of the Roman Empire, electrum – two parts gold and one part silver – was used only for currency.
The first Egyptian Pharaoh established a relationship between gold and silver, where one ounce of gold was equal to the value of two and a half ounces of silver.
During the past few years, as gold has reasserted its role as a means of exchange, silver has followed. That is why the price of silver today has increased more than six-fold in the past six years.
The Silver Correction is Coming to an End
In April 2011, the price of silver began a long and deep period of correction. After trading at $49.82, the price retreated to a low of around $26. That correction has lasted more than a year, but is now coming to an end.
The interesting thing is that silver, very quietly, has broken above short-term resistance at $29. The next level of resistance is $32 and, after that, the sky’s the limit.
In fact, the current bullish state of the gold market is just what silver needs to propel it higher. When the gold price makes a new high in 2012, so will silver – and that could be significantly north of $50 an ounce.
The chart above tells the story. There is major support for the silver price at $26. Short-term support lies at a tad over $27.
But don’t be surprised if silver takes over the lead and gold follows the rise. Its dual nature as a precious and industrial metal will turbo-charge the coming bull move.
The Silver-Gold Ratio is High
The silver-gold ratio reflects the relationship of the value of silver relative to gold. Dividing the price of gold by the price of silver is the calculation for this relationship.
Back in ancient times the ratio was 2.5:1, when silver traded at $50 in 1980, the ratio was 16:1. At its 2011 peak, the ratio was 32:1. Today, the ratio stands at more than 55:1. That means it takes more than 55 ounces of silver to equal the value of one ounce of gold.
That is because silver has been viewed as an industrial metal over the past year and the market seems to have forgotten its value as money.
Buy Silver While it is Still Cheap
But that won’t be the case for long. Silver will soon break higher and re-establish itself as a precious metal. As gold moves higher, silver volatility will pick up and the buyers will once again come out of the woodwork.
The best way to own silver today is to buy coins and bars. There are some cheap silver producers like Silver Wheaton (SLW) out there. But, the purest play is to own the commodity itself.
Get ready, folks. When silver breaks higher this time, $50 will be a distant memory. And silver’s role as an industrial metal will once again take the backseat to its role as a precious metal.
At less than $29, the time to buy is now.
Your eyes and ears in the commodities market,
Andy Hecht
P.S. Precious metals, as real assets with real value, should always be an important part of your portfolio. We’ve recently found a new way to help make the buying and selling of these valuable assets even easier. We’ll be telling you more about this exciting opportunity over the next few weeks… stay tuned!
Other Posts from the Author
- The Contrarian Play in Your Morning Coffee - September 6th, 2012
- What to Own as Silver Gets Ready to Rally - August 28th, 2012
- Why Mid-West Drought Will Drive Up Gasoline Prices - August 20th, 2012
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Tags: gold, precious metal, reserve currency, silver
