I applaud Federal Reserve ChairmanBen Bernanke for pulling out
all the stops in an effort to supercharge theeconomy .
The unlimited quantitative-easing (QE ) measures, capital
infusions and ultra-low interest rates have ignited a strong rally
in thestock market . This rising economic tide has helped lift all
ships from the smallest, newly-fundedIRA accounts to behemoth
corporate interests. Everyone is getting wealthier, but the
question is, what are the looming side-effects of such an
Whilethe Fed 's efforts are still being absorbed and utilized by
the economy in a positive way, the excessliquidity may eventually
lead to an extremely inflationary economic situation.
Presently, the dire situation in Europe is counteracting
themoney liquidity in the United States. This means the U.S. dollar
is still viewed as a bastion of safety on the global scale, despite
the Fed's intervention. But this situation can't last forever, and
when this perception ends, the U.S. economy may enter a period of
How can investors protect themselves?
Historically, precious metals have been the go-to instrument
tohedge against andprofit during inflationary times. Gold and
silver are the primary precious metals to which investors flock to
protect their portfolios during difficult economic cycles.
Gold is clearly more popular along with energystocks , but this
popularity has resulted in surging prices on the anticipation of
inflation rather than inflation itself. Remember, markets are
anticipatory mechanisms, so price often anticipates what's going to
happen and moves before the fact. While silver has also moved
sharply higher in anticipation, it has become disconnected from
gold's rocket ride toward $2,000 an ounce.
Clearly, silver makes a betterinvestment than gold right
Here are three reasons why...
The gold/silver correlation has become skewed
As you could see from the chart above, the gold/silver
correlation is historically off. During the years, gold and
silver have moved together, with gold generally costing about
10 to 20 times as much as silver. Historically, this ratio
has been determined to be 15 or 16. Presently, the ratio is
50, meaning that silver can surge higher, narrowing this
ratio to historic norms, and still not be considered
Silver demand hits historic highs
Theexchange-traded fund (
Silver Trust (
received a record of $603 million on a single day in
January 2013. This ramps up the assets of this silverETF to
$11 billion.Investments in all silver-based
are now at an all-time record of more than 19,000 tons
globally. Clearly, investors are moving into silver.
Technically, silver prices have
Silver has been trading in a tight 10-point range since
November 2011. The stock remains above the 200-day
simplemoving average , visibly indicating the uptrend is
still intact. The consolidated channel provides the
investor a clear technical entry point.
Risks to Consider:
Inflation may be a long-way off. Despite all the signs, the Fed
may be able to fight market forces, keeping inflation in check for
a much longer time than anticipated. Always use stops and position
size properly wheninvesting .
Action to Take -->
I like the
Silver Trust (
ETF as an easy and effective way for investors to purchase
silver. However, I wouldn't buy now, as there is no telling how
long the presentconsolidation will continue. I'mbullish on silver,
but I'd still like to wait for a clear breakout of the
consolidation for this investment to make sense. Buying in on a
breakout close above the upper channel line at $35, with an
expected 18-month target of $47 once entered is the plan.