Silver is a base metal

That's what this chart is saying.

I find this chart enlightening on several levels and an excellent roadmap for trading the near future. Using GLD as a proxy for gold and SLV as a proxy for silver, we can clearly see that silver performed as a classic precious metal asset class for a long time. Then with the onset of crisis that notion was blown away, silver immediately stopped tracking gold and dropped with the industrial indices (I'm using the Dow as proxy, as it's not called the Dow Jones Industrial Average for nothing).

The crossover drop happened just before the big swoon in the broad markets at the end of September 2008. Was silver the canary in the coalmine? I don't know about that one, but 20/20 hindsight makes it an intruiging thought.

It also explains, without recourse to silverbug paranoia and all that tosh about the PTB manipulating every given moment of our financial life, just why silver dropped as hard as it did when it did. Put simply, the market has rejected the notion that silver is an asset class...for the time being, at least. I more than suspect that silver's behaviour has a lot to do with this previously published chart that demonstrates the big rise in modern silver production.

This in turn is due to the fact that a large portion of modern-day world silver production is as a by-product of other metals, notably zinc and lead (and no doubts that they're base metals).

So what does this tell us? In my view it tells us that we can throw out the gold:silver ratio for the time being, as silver and the miners that produce silver will perform as a direct function of the broad economy. Or in other words, silver is operating as a classic commodity. Stick the Ag price up on the kitco basemetals page and strike it from the main website page as of this moment.

Also, taken with the chart above that shows SLV compared to a cross-section basket of silver miners (PAAS, SSRI, FVI.v, FN.to and GPR.to), it's clear that the silver miners offer significant leverage to the metal going forward (having been punished more severely from late September onwards).

Bottom line: Rules to trade silver as of today:

1) Watch the dow and forget about the price of gold. Silver is not tracking gold, it is tracking the broad markets. Silverbugs won't like the idea of that, but since when have they been right about the market anyway?

2) If you feel there is significant upside in silver the metal, trade the silver stocks. They will give you more bang per buck, at least for the time being.

The final question to be asked is; "What would make silver 'cross back', leave the industrials behind and allow it to start tracking gold again?" That's something that is worth thinking about for the medium term, but I really feel we have enough on our plates trying to survive on a week-to-week basis for the time being. Any suggestions for an answer to this part of the riddle gratefully received.

DYODD, dude

Related Post
A couple of interesting* charts on silver

An interesting move in Gold this morning

click to enlarge

Gold went under $700/oz as a continuation of the last few days' market action, but then the reversal to $720/oz has been pretty quick and perky.

FWIW, I'm going to take the first real risk I've taken in weeks and add to my severely underwater JAG (bot yesterday at $3.30). My normal chickens*** attitude would have me bailing at a loss, but this time I say "Aaaah, what da hell...double down!".

So I've added at U$2.77. Average now a touch over $3.

Spot gold and US three month treasury bills

This is not a coincidence

It looks pretty simple to me, in fact.

When there's a sudden rush for the door, the flight to quality is to the T-Bill, the T-Bill and then the T-Bill. Under nearly all circumstances is has the market breadth to be able to soak up countless zillions of dollars at any given moment. But when nerves turn to outright panic and there's a overwhelming demand for the 3 month T-Bill, it's like 25 fat guys trying to squeeze through the same door at the same time. The result is that flight to quality money can't get parked in the T-Bill quickly enough the yield drops and drops and drops and the fat money looks for an alterative place to hide.

That alternative is gold. To the utter chagrin of the goldbugs, it has to be said that gold is very much second choice as a safety buy and is only used in extremis situation like mid March and Wednesday 17th (two days ago). The plain vanilla fact of the matter is that the gold market is too small to be able to efficiently carry the amount of money that moves around the world market. We saw that Wednesday when the sudden overwhelming demand for gold made it spike the hardest since 1999. It wasn't the end of the fiat dollar or any other such nonsense dreamed up by the tinfoil hatters, it was "just" an extreme case of more buyers than sellers.

Therefore it makes plenty of sense to watch the yield in the three month T-Bill tomorrow. If the yield rises it means there is plenty of room for any frightened money to go and hide there. Therefore it won't be needing gold. If the 3 month yield drops even closer to zero then the panic is on again and we can expect gold to react accordingly.