HardAssetsInvestor

Written by Sumit Roy  |

October 11, 2011

Precious Metals Monitor: Silver & Palladium Will Outperform Gold As Markets Recover

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Large industrial demand components mean that silver and palladium may enjoy more upside as financial conditions improve.

This past week was a positive one for precious metals on the whole, as improved investor sentiment boosted the complex. Ironically, this uptick is rooted in the sense that European leaders will ultimately be able to stem the sovereign debt crisis in the region.

The latest developments included a promise by German Chancellor Angela Merkel and French President Nicolas Sarkozy to deliver a "comprehensive response" to crisis by the end of the month.

The primary component of the response is likely to be a bank recapitalization plan, which Merkel outlined last Friday. She said banks would eventually be able to raise capital through the European Financial Stability Facility (bailout fund) as a last resort, once they exhaust all other avenues.

Meanwhile, the European Union and International Monetary Fund said Greece was likely to receive its next tranche of bailout funds in early November.

Clearly, financial markets are taking an optimistic view of the situation in Europe right now, yet precious metals have been benefiting. That may sound counterintuitive, but as we’ve written before and as we discussed in our latest podcast, throughout gold’s 11-year bull run, there have been periods when gold tends to move with other risk assets, such as other commodities and stocks.

This phenomenon typically takes place during significant market corrections — which are usually spurred by economic concerns — and immediately after said corrections. Once the panic phase subsides, however, gold tends to resume its role as a safe haven and move on its own merits.

Our view is that the markets have exited the panic phase and will trend higher from here. However, we will need to see the S&P 500 close decisively above the key 1220 resistance level to confirm.

If this optimistic view is correct, precious metals should trend gradually higher, though we do not foresee the all-time highs of earlier this year to be eclipsed in the short term. Against a relatively more favorable economic backdrop, silver and palladium should outperform.

Both have significant industrial demand components and both are priced favorably relative to gold after the recent sell-off. The gold/silver ratio stands near 52, which suggests that now may be the time to overweight silver relative to gold.

That being said, gold’s run is far from over. The three legs of the bullish thesis — rapid demand growth from emerging markets such as China and India; sovereign debt concerns across the developed world; and the increasing awareness of gold and silver as monetary alternatives (legitimized by central bank buying) — will keep prices supported. But a period of consolidation is necessary before the yellow metal can rally to record territory once again.

Gold Daily Chart 1-Year:

Silver Daily Chart 1-Year:

Platinum Daily Chart 1-Year:

Palladium Daily Chart 1-Year: