Investing in silver makes more sense than gold now

Here are 3 reasons why silver is set to rebound handsomely soon.

By StreetAuthority Feb 14, 2013 12:59PM

By David Goodboy

I applaud Federal Reserve Chairman Ben Bernanke for pulling out all the stops in an effort to supercharge the economy.

The unlimited quantitative-easing (QE) measures, capital infusions and ultra-low interest rates have ignited a strong rally in the stock market. This rising economic tide has helped lift all ships from the smallest, newly-funded IRA accounts to behemoth corporate interests. Everyone is getting wealthier, but the question is, what are the looming side-effects of such an unfettered policy?

While the Fed's efforts are still being absorbed and utilized by the economy in a positive way, the excess liquidity may eventually lead to an extremely inflationary economic situation.

Presently, the dire situation in Europe is counteracting the money 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 unprecedented inflation.

How can investors protect themselves?

Historically, precious metals have been the go-to instrument to hedge against and profit 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 energy stocks, 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 better investment than gold right now.

Here are three reasons why...

1. 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.

2. Silver demand hits historic highs

The exchange-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 silver ETF 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.

3. 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 simple moving 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 when investing.

Action to Take --> I like the iShares 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 present consolidation will continue. I'm bullish 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.

David Goodboy is vice president of marketing for intrendX llc, a New York City-based marketing service to ultra-high net worth family offices and individuals. He also works with Adria Partners LLC, a bond lease real estate fund.

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commoditiesetfFederal ReservegoldSilverSLV

11Comments

Best

Feb 14, 2013 2:21PM

Ag, Au, Pl, even lowly Cu are all good... guns and ammo... farm land... Foreign currency and foreign stocks...

Obamanomics will bring about economic collapse. Prepare!

Previous replies

accord0

Feb 14, 2013 3:22PM

I agree with mirage guy. i would put gold last in priority behind copper, silver, platinum, palladium. Gold is overvalued relative to those other metals. Except for copper, governments have meager stockpiles of silver, palladium and platinum compared to gold. Gold is primarily useful as money but what is agreed upon as money can change over time.

Previous replies

Bushman905

Mar 14, 2013 5:43PM

Limo pat- it's funny how you down the right wingers all the while sounding like a brainwashed parrot for the Nationalist Socialist Democratic Workers Party

Previous replies

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Apr 12, 2013 12:57PM

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Previous replies

REGAL MAN500

Feb 14, 2013 3:41PM

Obama has been a big positive for the economy.6 million jobs added, the Dow up 70%,

corporate profits way up, companies are sitting on records amounts of cash for

buybacks and expansion.If ypu`ve missed the bull market you have to feel like the

biggest fool in the world.These are the good old days unless you`ve hung up on the

right wing lies this far right media pushes.Maybe people will get smarter in 2017

when Hillary takes office.Many right wingers can`t even spell Obama`s name.

Previous replies

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Investing in silver makes more sense than gold now

Here are 3 reasons why silver is set to rebound handsomely soon.

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