Gold is the most widely accepted precious metal position, but silver actually has stronger characteristics which could yield better investment returns.
Volume ‚Äì When looking at any sharp breakout in stocks, commodities, currencies or other asset class; most traders will tell you that they want to see heavy volume in order to validate the trend. Volume which is above average usually indicates strong institutional buying (or selling in the case of falling prices), and when institutions make a move, it can take them several days or even a period of several weeks in order to build their full position. Nimble traders can often see these volume tracks and get involved quickly in order to profit from the continual buying as a group of professional managers build positions.
Another thing that volume can tell you is that many people have been caught off guard. In the case of precious metals, the argument against inflation has been widespread as economists believed that a weak recovery would keep loose policy from resulting in the traditional inflationary pressures. If those opinions prove to be false, there will be many investors and traders alike, scrambling to find protection which could result in a long-term buying spree for gold and silver.
Currencies ‚Äì The media has named several forces which are pushing gold and silver higher, but one of the most important factors is the continued weakness of the US dollar. The bottom line is that the dollar is quickly losing ground and becoming worthless as we print more paper in order to meet our obligations. In order for gold and silver to continue to rally, we don‚Äôt necessarily need the dollar to continue to be weak compared to other currencies. I‚Äôm much more concerned with the actual purchasing power of the dollar when it comes to goods and services than with the comparison to other currencies. But if we do continue to see the dollar decline on a currency basis, then gold and silver will most certainly remain a great hedge against the currency decline.
Stimulus ‚Äì The new administration is working very hard to pull the economy out of the recession and generate new growth. But the stimulus policies are actually designed to lead to inflation if necessary in order to prop up an economy and hopefully generate some new jobs. This is a horribly loose monetary policy and will lead to rampant inflation and be a wonderful push up for precious metals prices.
How to Profit From the Move
The best choice for equity traders is to pick up shares of GLD (an ETF which mimics the price of gold). I would suggest you also look at silver as a way to diversify and potentially get more bang for your buck.
Gold is the most widely accepted precious metal position, but silver actually has stronger supply/demand characteristics which could yield better investment returns. While nearly every ounce of gold that has been mined over the last five thousand years is still in existence (in the form of jewelry, packed away in vaults, as collectors items ‚Äì or otherwise stored), silver is actually used in many industrial processes. It is used for x-rays, in making polyester, to solder electrical connectors, in high quality reflective processes, and even for medical wound dressings. This means that silver is being used up and at the same time it is seen as a storage of value.
Aggressive investors might consider buying calls on the silver ETF (SLV). I suggest the January $17 or $18 strike price which is still relatively cheap considering how close the underlying is to the strike price. We will likely see SLV above $20 within a couple of months and possibly even above $30 by the end of the year. Long-term, the price of silver could increase 3 times the rate of gold as unprecedented stimulus and irresponsible government spending leaves its inevitable mark on our economy.
If you use this trade please let me know so I can track the general precious metals interest on Amelia Island. I‚Äôm in it and looking forward to very merry Christmas holidays.*
*Research from Zachary Scheidt, Zachstocks.com
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Market Man you are right on.. Silver is more affordable for those of us who may not have the financial horse power it takes to dive into the gold market.