CRISISBOOM

seekingalpha

I previously heralded silver’s breakout above $40, as well as gold’s breakout above $1600, as the dawning of the next leg up for precious metals — one that would send silver past its previous high of above $49 reached earlier this year. I still believe that silver will find its way well into triple digits in the coming years, as monetary demand from the global sovereign debt crisis is only escalating and will be the primary driver of silver’s price, but I’m not so sure it will happen imminently; in light of the tumultuous events of this past week, I’ve taken off some of my silver positions in exchange for gold instead. My rationale is as follows:

1. Because of its industrial role — silver is used to create a wide variety of goods, such as warfare weapons and solar panels — silver is more associated with risk. If we see the return of the bear market in equities like we saw in 2008, silver is going to get hit harder than gold.

2. I expected the gold/silver ratio to fall below 40 and approach its previous low of 33. Instead, we saw a bounce off 40. I still believe that silver will unofficially be re-monetized, and that this process will send the gold/silver ratio to 20 or lower — but I am not interested in trading against the trend. The gold/silver ratio has been as high as 100 historically, and while I doubt we will go that high again, I do find it conceivable that we can go higher. My insistence upon trading with the trend and keeping risk tightly under control requires that I see more momentum in the gold/silver ratio before selling some of my gold in exchange for silver.

3. The weekly chart of silver has also begun to show some signs of bearishness as well.

QE2 contributed greatly to the mini silver bubble that appeared in late 2010 and early 2011, and I believe QE3 is what will get the silver bull going again; indeed, silver did rally on the talk of QE3 earlier this week. Once QE3 actually kicks in, the bull may resume.

I prefer to be a bit more active in my trading of silver because of how volatile it is; active trading allows me to more closely manage its risk while participating in its upside. If you are comfortable withstanding drawdowns, than stocking up on silver may still be worth your while, as the underlying fundamentals have only strengthened. But if you’re more interested in minimizing drawdown, sitting in gold and holding a reduced position in silver until silver shows some more bullishness may be a preferred strategy.