The overnight market wasn't good to silver. By 7 a.m. Eastern Time, COMEX futures were down more than 3.5% ahead of the London cash market fix. But that shouldn't come as a surprise to metals traders. After all, silver ran the table in the last trading week of 2008, rising 7.7% in the spot market against gold's 3.9% gain. A reaction ought to be expected, right?

There are a lot of silver bulls out there salivating at the prospect of a white metal breakout. For far too long, many say, silver's been undervalued. It's as if the gold/silver ratio – now at 78-to-1 – has mocked them. Gold just seems to get all the glory; silver, the dregs.

The gold silver/ratio itself seems primed for a breakout. Just look at the chart below. A pennant flag's formed as the ratio's trading range narrowed over the past quarter. That's the trading equivalent of mashing a coiled spring. The spring uncoils violently if the pressure's suddenly relieved. The fun part's guessing the reaction direction: up or down?

Gold/Silver Ratio

Ratio traders have a further complication: Does gold or silver make the move? After all, the ratio expresses gold's price multiple over silver. A falling ratio – the scenario so earnestly sought by silver aficionados – can be wrought by either gold's decline or by silver's ascent, in absolute or relative terms. Which is more likely?

Well, look back to September 2008 for a clue. In just three weeks, gold's multiple shot up to 84 from 66 amid all the early recessionary hoopla. The yellow metal lost 8% while silver tumbled 28%.

If you believe we've got more disinflation ahead, bank on the ratio moving in favor of gold (the multiple getting larger). If you're a reflationist, though, the safer long bet's on silver.

A couple of factors line up in silver's favor now. Numero Uno: Our monetary inflation indicator's (see: "Explaining Inflation ... Again") found its legs and turned upward after declining for most of 2008. Numero Due: Silver's got its own technical basing going on. For the first time in months, there's some resolve being shown by silver buyers.

London Silver Fixings

So is this the time to buy silver? Perhaps a better time than the recent past.

Many metals lovers, however, have complained of shortage in their local cash markets. For them, we offer our primer on using the wholesale market for retail-sized purchases ("Precious Metals: ‘I Can Get It For You Wholesale'").

For traders, some more silver options will be explored in tomorrow's column.