HardAssetsInvestor

Written by Sumit Roy  |

November 27, 2012

December Key Month For Silver As Prices Top $34 & Gold/Silver Ratio Falls To Important Level

Details

We offer our latest analysis on the precious metals market.

Gold and silver took another leg higher over the past week as the duo benefited from a broad rally in financial markets. Looking forward, December promises to be a very eventful month, highlighted by two key events: the expected resolution of the "fiscal cliff," and the Federal Reserve's next monetary policy decision.

In our view, both of these events will prove to be bullish catalysts for gold and silver. The removal of the fiscal-cliff shadow over markets will spur an increase in investor risk appetite and fuel a rally in financial markets, gold and silver included.

Meanwhile, at its next meeting on Dec. 12, the Federal Reserve may announce another round of quantitative easing to replace the expiring Operation Twist. Additional monetary stimulus is always seen as a bullish factor for gold and silver.

Currently, the yellow metal is hovering near the $1750 area, halfway between support at $1700 and key triple-top resistance at $1800. But it's silver that has outperformed. The grey metal is just shy of its triple-top resistance near $35.

GOLD

SILVER

Silver's outperformance is set to continue, in our view. Once the overhang of the fiscal cliff is removed, markets can shift their focus back to the underlying fundamentals of the global economy—which are clearly improving.

Because close to 40 percent of its demand comes from the industrial sector, silver is poised to benefit from a stronger economic backdrop. Of course, it will also benefit from the continuation of ultra-easy, central-bank monetary policies around the world.

The gold/silver ratio—a measure of the relative value of the two metals—last stood near 51. That's down from this year's high of close to 59, but well above last year's low of 31.7, which was the lowest level for the ratio since 1979.

Over the past year, the ratio has tended to bottom out around 50 before rebounding. If we see the ratio begin to make a decisive move below that level, it may be an indication that silver is set for a period of steep outperformance versus gold.

Bottom Line: Gold and silver are set to move higher in the month of December as the Fed provides additional monetary stimulus and as the fiscal cliff is averted. Look for silver to outperform; pay particular attention to the 50 level on the gold/silver ratio.

PLATINUM

PALLADIUM