|Back to main|
3 Reasons Investing in Silver Makes More Sense Than Gold Now
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 unfettered policy?
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 unprecedentedinflation .
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 now.
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 abnormal.
Silver demand hits historic highs
Theexchange-traded fund ( ETF ) iShares Silver Trust ( SLV ) 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 ETFs are now at an all-time record of more than 19,000 tons globally. Clearly, investors are moving into silver.
Technically, silver prices have consolidated
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 iShares Silver Trust ( SLV ) 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.