December 03, 2012 at 11:20 AM EST
Chart Alert: Silver May Be Breaking Higher

 

Silver May Be Breaking Higher

Silver appears to be taking off again on the chart and is at its highest level in six months, but the white metal must take out the $35.00 resistance level in order to move toward $40.00. The aggressive upward move by silver has largely been driven by the move in gold and 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, along with other encouraging economic data is adding some optimism for economic renewal.

While gold is considered more of a pure-play hedge against risk, any sign of industrial recovery helps, as unlike gold, silver is used in numerous industrial applications. (If you missed my article on one of my favorite gold stocks, read “Newmont—the “Best of Breed” of All Gold Stocks.”)

The price of silver has had some legs on the chart since its breakout in August, based on my technical analysis.

On the chart below, you can see the upward move in prices for the March contract above the 50- and 200-day moving averages (MAs), which is bullish. The moving average convergence/divergence (MACD) is also quite bullish, but it may be approaching a top. The risk is that the run-up appears to be overextended and vulnerable to some near-term selling pressure with resistance around $35.00.

For silver to advance higher, we need to see a strong break just above $35.00 and the 13-week high of $35.51 to target the 52-week high of $37.43.

 DILVER Spot Price Stock Market Chart

Chart courtesy of www.StockCharts.com

If silver can hold, we could soon see the metal take a run at 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 it could surge, driven by speculative trading.

Ultimately, where silver goes will depend on the global economy. The same goes for 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 it has moved much higher to average 47:1 in the twentieth century. The spot gold price was $1,725 on Friday, compared to $34.19 for spot silver. This equates to a current gold–silver ratio of 50.5, which means that silver could be undervalued and head higher toward the $38.00–$40.00 level.

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

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