Silver Investing - Is Silver Decoupling From Gold?
I have been following gold and silver very closely for a couple of years. In the past few months I have noticed that on days when the price of precious metals move significantly, the price of silver usually moves two, two-and-a-half, or three times as much, on a percentage basis, as the price of gold. I began to think of silver having a beta of 2 to gold. This beta factor has been good for silver investing because there have been more up days than down days.
I reasoned that the difference in the fundamentals between gold and silver was responsible for the greater price move in silver on the upside, and that market manipulation was responsible on the downside. The primary difference in the fundamentals is that over half of the annual production of silver is consumed by industrial applications. As you may already know, gold has very little industrial application. Those of us involved in silver investing for the long-term expect supply/demand to win out in the end. At the beginning of 2011 I wrote that the ratio of the price of gold to the price of silver was about 68:1 on January 1, 2010, and had fallen to 46:1 on January 1, 2011. At the low of both the price of gold and the price of silver in late January 2011, the ratio rose to 48:1. Today, just a couple hours after the open, the ratio is 42:1.
Last week I read two technical analysis of the price of gold. Both conclude that a significant pullback is very likely. If the beta I spoke of earlier holds, that would be very bad for silver investing. I considered placing stops on my paper silver investments, but decided against it. The price of silver is so volatile I could easily get stopped out and not be in the market if there is a quick reversal. I'm glad I left my money where my mouth has been the past several months. In the last three trading days, the price of silver has risen about 10% while the price of gold has risen less than 2%. Never in the recent months that I have followed gold and silver daily has silver outperformed gold by such a margin. What's happening? I don't believe anyone knows for sure, but I think it may be the first rumblings of silver fundamentals exerting themselves.
Everyone who has a basic understanding of the futures markets knows that the amount of silver represented by open contracts exceeds the amount of physical silver in the world by hundreds, and usually thousands of percent. Most contract holders either buy or sell, depending on whether they are long or short, to close their position. The contracts that are held to expiration be settled within 30 days. I think the physical shortage of silver may be being felt. Those who have it, like me, aren't willing to sell. As frantic future traders scramble to cover their positions before the February expiration date, price is shooting up. But I'm still not selling
Of course, if I did sell my physical silver, it wouldn't be enough to settle even 25% of one of the tens of thousands of open contracts. So I'm little more than an observer. But silver investing is beginning to get very interesting. When the price of silver does decouple from that of gold, and it may be happening now, I expect it to remain decoupled until the ratio gets to the 200-year ratio of about 17:1.
Learn how to protect yourself against the current (and impending) economic disaster with silver investing. For more information: http://www.esilverinvesting.com
Subscribe to:
Posts (Atom)