Sunday, September 30, 2007

A Technical Look at Silver Stocks Part 1

The month of September was an incredible one for all gold bugs out there. The XAU gold stocks index increased in value by 19.88% during this month. As well, gold bullion tacked on $69.90 an ounce, increasing 10.51%, and silver, for the first time in a while, rose by a faster pace, increasing in value by 13.81%.

As predicted, the US Dollar broke critical support at 80, and melted down after that point. The US Dollar is so weak that for the first time in 40 years, the Canadian Dollar is worth more than a green back.

With such a large increase over a short period of time, one might think that there is little profit potential out there. I do not believe this. Rather, I feel that this is the beginning of a much larger move. And more specifically, I think that silver has the most potential.

One of the reasons I believe this is because silver has, until recently, been lagging gold. The following chart shows a weekly chart of the SLV/GLD ratio. Basically, when this chart is falling, silver is under performing gold. When it is rising, silver is outperforming gold. The reason I am posting this chart again is because an RSI buy signal has just been triggered:

The other candle chart beneath the ratio represents silver bullion by itself. The two charts are similar, but we can get some additional insight by looking at this perspective. The main thing to take away from the above chart is that silver is "cheap" relative to gold.

Let's have another look at silver. Here is a daily candle chart of SLV, the silver bullion ETF:

The main point to note in the above chart is that SLV gapped up above its 200 day moving average. This is an incredibly bullish sign, in my opinion. In the event of any sort of correction, silver should find support along the blue rectangle drawn.

Finally, let's have a look at this week's commitment of traders chart:

The last time I posted this chart, I said that the commercials had reduced their short position to extremely bullish levels. Now that a few weeks have past since then, the chart is still looking very bullish. The large speculators are only now beginning to "wake up", as their position only this week is larger than the small speculators. The commercials can still increase their shorts by a fair amount before things start looking bearish.


GI said...

great analysis! Love your site!

Danny Merkel said...

Thank you. Comments are always appreciated. I feel the same way towards your blog.