September 14, 2009

Gold vs Silver Futures

Financial news is finally picking up the latest commodities advance, with all eyes fixed on Gold. But what about other metals, and in particular Silver? The weekly candle chart above demonstrates the correlation between the two metals, Gold on top, Silver on the bottom. Black vertical dashed lines mark the most three significant pivot highs in Gold and Silver, with red arrows denoting the actually high price. Red horizontal dashed lines denote the corresponding swing highs from July 2008. A linear regression channel is plotted for both instruments, with 0.618 and 1.27 deviations, from the most recent swing low in October 2008 to the most recent large advance.

Several patterns are obvious in Gold, not the least of which is the current resistance near 1,008 forming a triple top. An ascending triangle, as well as a possible inverse head and shoulders, has also formed. The latter two patterns await a breakout to the long side to denote a bullish breakout.

Note however the contrast in Silver. In the last commodity bull rush and subsequent decline, Silver traded fairly correlated to Gold. While the polished metal fell nearly in unison with Gold off its highs in 2008 until basing, the advance has been more subdued relative to its more widely reported sibling. The triple top in Gold has not been matched in Silver, and the upper deviation band has contained the advance. Indeed, the current advance in both metals is coming off support at their respective lower middle regression lines.

What's stopping Gold from moving onward, and is the current craze a pure commodity or fear based play? Clearly the advances into the highs of 2008 where commodity driven - is the move now a flight to quality, and if so what does this bode for Silver? Points of resistance for the advance in both markets are drawing different battle lines, with Gold looking to break its triple top and confirm the inverse head and shoulders pattern, but Silver clearly trading in a channel well below its previous swing high.

Whatever the outcome of the 2009 flight to Gold, be it a flight to quality or a true resumption of the commodity push of 2008, technicians should watch both metals near their respective resistance levels. The rebound in Silver has been very methodical relative to Gold, and the jury is still out regarding its ability to set new highs.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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