Tags: advani | blog | gold | silver

All That Shines May Be Gold (and Silver)

Tuesday, 26 Jun 2012 08:46 PM

By Ashish Advani

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The yo-yo effects on the stock markets and the unending drama in Europe continues… Sigh! I am not sure when the global investor (and traders) will suffer fatigue at this futility.

If this trading pattern is a means of job safety where traders are in every day and winning half the time to lose the other half the time, ending the year where they began but staying employed in the meanwhile, then I am sure they are successful.

On the other hand, if they are trading to make money, I am not sure they are showing any significant results. Markets suffer through bouts of optimism and pessimism almost like clockwork each week. Headlines scream of support and opposition, and the days move in positive and negative territories accordingly.

But I have noticed a definite trading pattern in the gold and silver markets that seems to buck this trend a little bit. Yes, gold and silver have also become a manipulated market, but I am seeing some trends that give me a hope for a solid run shortly.

While the stock markets gyrate, gold and silver seem to hold a steady pattern between $1,550 and $1,650 on gold and $26-$27.50 on silver. We have clearly seen a floor under these ranges for both metals. And currently both are right smack in the middle.

I expect a breakout of this range trade in the next few weeks as we see the markets head in some direction. If there is rampant fear in the stock markets, people will run to gold as the safe haven.

On the other hand, if we see a bull run in the stock markets, it will most likely be caused by a massive liquidity dose that will be a coordinated effort of the European Central Bank and the Federal Reserve. At this stage of the U.S. markets, my opinion of QE III is a mere “when” not an “if”. And I expect this “if” to be late July/early August. So if the markets run up, we will see the dollar plummet, and that will mean gold and silver will rise in U.S. dollar terms.

What is also fascinating is the ratio between gold and silver. Historically we have seen gold trade at a multiple of 40 to silver. That means that if gold is at $1,600, we should expect silver to be at or around $40. Today this ratio sits at a very high level of 58. This means we can see a much faster appreciation in silver compared to the appreciation we will see in gold prices.

In any case, if you are tired of keeping track of whether the stock market is up or down, I would strongly recommend starting to accumulate a position in gold and silver. I would put in a higher allocation of silver (two-thirds) to gold (one-third) as I begin to start an accumulation phase.

I would suggest buying gold at the lower end of the current range of $1,550 and silver at about $26.50 or so and add to my previous positions. I would use a simple ETF to do this investment unless you want to invest long term, in which case I would suggest buying actual coins and bars.

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