Daily Gains Letter

Buy Silver to Play Economic Renewal

By for Daily Gains Letter | Jan 15, 2013

DL_George_8Silver has the potential to advance on the chart, but the white metal must take out the $35.00 resistance level in order to move towards $40.00.

The upward move by the white metal has largely been driven by the move in gold along with market speculation since silver is looked at as more of a trading commodity.

The better-than-expected U.S. gross domestic product (GDP) growth revised up to 2.7% for the third quarter. This, along with other encouraging economic data, is adding some optimism regarding economic renewal.

While gold is considered more of a pure play hedge against risk, any sign of industrial recovery helps, as silver, unlike gold, is used in numerous industrial applications.

Silver has been flat since its breakout in August 2011, based on my technical analysis.

As you can see on the chart, the upward move in prices for spot silver above the 50-day and 200-day moving averages is bullish. The moving average convergence/divergence (MACD) is also mixed.

For the white metal to advance higher, we need to see a strong break just above $33.94 and the 13-week high of $34.38 to target the 52-week high of $37.43.


Chart courtesy of www.StockCharts.com

If silver can hold, we could soon see the metal take a run at $40.00 and the $50.00 level reached in April 2011. Trading in this metal tends to be quick, so you need to be watching closely. A move could be steady and follow the economic renewal or could surge driven by speculative trading.

Ultimately, where silver goes will depend on the global economy. The same goes with copper, which moves in relation to the economy and GDP growth.

Looking at it from another angle, the fixed exchange rate between gold and silver was 15.5:1 in the nineteenth century, but moved much higher to average 47:1 in the twentieth century. The spot gold price was $1,674 on Wednesday, compared to $31.47 for spot silver. This equates into a current gold-silver ratio of 53.19, which means the white metal could be undervalued based on this ratio and head higher towards the $35.00-$40.00 level.

The bottom line is that we need to see a strong move above $35.00 to give us any confidence for silver to head higher.

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