Silver's Big Picture Outlook

Here is my recent article for the Trading Deck at MarketWatch.com

By J.C. Parets

The price of Silver has been in correction mode since its peak this Spring. We don't hear about it every day like we did back then. People don't get as offended these days when you say something negative about the metal. It seems like some of the sex appeal has worn off a bit. So now that some in the trading community have forgotten about it, let's take a look at Silver from both a short-term and longer-term perspective.

There is no question that Silver ($Si_F) today at $33/oz is cheap based on historical measures. Sure the nominal price of Silver hit the 1980 highs of $48 back in April of this year. But when we're comparing data from 30 years ago, we need to adjust for inflation to make sure we compare apples to apples. The inflation-adjusted price of Silver in 1980 was $139 if we use the Consumer Price Index (CPI) and $114 if using the Producer Price Index (PPI). I'm not calling for triple digit Silver prices, but it is important to keep things in perspective and have these numbers handy. (Source: TheChartStore.com)

Now when we compare Silver with more popular metrics like stocks, it is also relatively inexpensive. In 1980, the Dow to Silver ratio got as low as 18:1. In other words, one share of the Dow Jones Industrial Average ($DJIA) bought you 18 ounces of Silver. Today, one share of the Dow buys as much 365 ounces. (Silver $33 & DJIA 12045).

If you compare it to a much broader index like the S&P500 ($SPX) , we see similar results. In 1980, one share of the S&P500 bought as little as 2.3 ounces of Silver. Today one share of the S&P500 buys us 33 ounces of Silver (SP 1246). Although these may seem like big numbers on the surface, Silver has been outperforming stocks for 11 years. This is nothing new. The trend in place for the last decade has been: Precious metals over Stocks. So we're not really trying to reinvent the wheel here, just acknowledging a trend that is already in place.

The near-term picture for Silver, however, is giving us some mixed signals. This is probably why we don't hear about the metal as much as this Spring when it was trending straight up. When traders are getting whipsawed around, they don't like to talk about it. That's ok with us; it is easier to make intelligent decisions when it's quiet and all that noise isn't hitting you over the head every day. As much as we can try to ignore it, we are still human after all.

On the chart, there is a very large flag pattern forming if we take it back a couple of years. We'll use the chart of $SLV because that is the easiest way for retail investors to get involved in this trade. Since the peak in April, the price action is clear: we have a defined downtrend channel with a series of lower highs and lower lows in between parallel trendlines.

You can read the rest of the Trading Deck article over at MarketWatch.com