Market Overview

Gold and Silver Gap Closing

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Gold and SilverCongratulations to investors who read our last post and did the trade of either shorting silver (NYSE: SLV), or buy gold (NYSE: GLD) and short silver. It was a very post as silver just crashed on Thursday, dropping 9% on Tuesday, and then another 14% on Friday. Gold was crushed as well, dropping 6% on Thursday, and then 5.5% on Friday. In short, while both metals dropped, gold coughed blood while silver had a heart attack.

Needless to say, the gap between silver and gold had closed dramatically, as shown in the 1-year chart and 5-yr chart below.

GLD vs SLV 1 year chart
GLD vs SLV - 1 Year Chart

GLD vs SLV 5 year chart
GLD vs SLV - 5 Year Chart

While there's still a gap between gold and silver for the 1 year chart, the gap has closed a lot, and that means the buy gold/short silver trade does not have as good a potential anymore.

Some people blamed the onslaught last week on margins raising by the Chicago Mercantile Exchange (NYSE: CME) and Shanghai, which was certainly a major factor, or liquidation by a large hedge fund, rumored to be John Paulson's fund, we think it was also that too many traders leaned on the bullishness, and the trade was too lopsided due to the fear of the Europe debt situation. Now with stocks rallying on Monday and Tuesday, silver and gold had gained back some of their losses as well. However, while the drop last week had shaken a lot of people, we don't think it has changed the long term bullishness much. With that, we believe the metals have further to drop, of which SLV could drop to 22 while GLD could drop to 140.

Nonetheless, with the month end approaching, which coincides with a quarter end as well, we should see gold and silver firming up until then. We think SLV has a good chance to get back up to 33/share and GLD to 166/share, but then we should see them softening again unless QE3 is installed. For investors who want to go bullish on them, be careful and hedge the bet if you can.

Posted-In: Chicago Mercantile ExchangeLong Ideas Sector ETFs Short Ideas Commodities Markets Trading Ideas ETFs

 

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