Silver ‘Misbehaves’ in Recent Rally: Time to Buy

Jeff Nielson submits:

Investors familiar with the precious metals sector are used to seeing a pattern in each short-term rally in this market. Silver begins these rallies especially undervalued versus gold, then gains back much of its lost ground by outperforming gold for the duration of the rally.

However, with gold’s recent surge we have not seen this typical pattern repeat, which begs the question: why not? Clearly, investors need to gain some understanding of this new, recent behavior in order to decide when/if to increase their investment in what is arguably the most under-priced commodity on the planet.

The easy “answer” is that silver has been held back by its additional status of being an “industrial metal”. Copper, often referred to as an indicator of the strength of the global economy, has leveled-out over the past few weeks – after marching steadily higher for most of the year. By itself, this answer seems inadequate, as silver’s superior performance (versus gold) in past rallies has occurred irrespective of moves in the copper market, yet in the current precious metals rally silver is only outperforming gold on days where there is a broader rally in commodities.

I recently saw some interesting speculation from precious metals commentator, Jim Willie – who reported a rumor that India had paid the IMF for its 200 tons of gold with silver. However, on the surface at least, this rumor seems to lack any plausibility. If the purpose of selling some of the IMF’s gold was to increase liquidity for its lending programs, then simply swapping gold for silver would be an utterly pointless exercise.

Perhaps the appropriate way to view this recent scenario is not that silver hasunder-performed, but rather that gold has over-performed (over the immediate term). It is interesting to note that prior to the announcement of the IMF sale of gold to India that several (legitimate) precious metals commentators had been predicting short-term weakness for gold – after India’s gold-buying holiday (“Diwali”) passed on October 17^th , and before Indian buying for its “wedding season” heats up in the 4^th quarter.

With the “surprise” sale of gold to India, some commentators are suggesting that the surge in gold is not so much a matter of the sale being seen as a “bullish indicator” for the sector, but rather that it caused some panic, short-covering – as there remain a group of foolish traders who seek to emulate the shorting behavior of the infamous bullion-banks (but lack the governmental “backing” which props up that crime syndicate).

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