Something New Stirring in Precious-Metals Pond


"Gold drifted mostly sideways last week. But investment letters report major, maybe meaningful change, below the surface of the precious-metals pond."

Gold drifted mostly sideways last week. But investment letters report major, maybe meaningful change, below the surface of the precious-metals pond.

Although bullion made no major moves, trading in a range above $900 an ounce, the gold shares were sharply up: Phlx Gold Silver Index (XAU: 126.10, -3.63, -2.8%) by some 4.6%, Amex Gold Bugs Index. (HUI: 298.74, -8.25, -2.7%) by 2.2%.

This means the indexes are up about 102% since their late-October lows. They are virtually at their 2009 highs.

Gold watchers have traditionally viewed gold equities as a leading indicator. But what has really got the gold letters excited is silver. Unusually, it defied the gold example and rose 4.5% to a new high for the year: $13.155 for the nearby Comex contact.

In a real bull market, the silver/gold ratio generally falls. That seems to be is what is happening now.

As James Turk puts in his Freemarket Gold and Money Report: "Last year, the gold/silver ratio repeatedly tested overhead resistance in the low 80s. . .The ratio closed on Friday at 69.5. So from its highest peak the ratio has dropped 17.6%, which is by any measure a very healthy gain achieved in less than four months."

Turk goes on to predict the ratio will go to 40 and eventually see the 1980 extreme below 20. Given the current gold price, this implies a silver price of $45.

Le Metropole Cafe's Bill Murphy is characteristically more colorful. He headed his Friday commentary "It's Rock 'N' Roll Time for Silver the Mule, Moonshot Ahead." He points out that there is actually an investigation into the long-alleged manipulation of the silver market. (Murphy and his writers claim gold has been manipulated, too). He suggests hopefully that, after the Madoff mess, regulatory agencies may be more aggressive.

Silver stock plays are hard to find. But the appearance of gold and silver ETFs (for instance Ishares Silver Trust [SLV: 12.73, -0.18, -1.4%] V and Spdr Gold Trust [GLD: 88.04, -1.55, -1.7%] t. GLD), spread trades are now far easier to put on.

The move in the silver ratio means sentiment toward the whole sector is changing. And bystanders are noticing. Thus Pring, who is not truly a gold bug but does monitor the metal, carries an interesting chart in his current InterMarket Review. He writes: "This series monitors our Global Gold Index, a composite of dollar, euro, and yen gold weighted by GNP. It broke decisively above a very significant trendline and registered an all-time high in January. . .There is a message here and it's not very complimentary to the central bank community. Oh Ben and Barack, what have you done?"

Depressingly, Pring's aspersion on America's old and new financial leadership is now widely shared by gold-sensitive letters.

Another new development: This is a Western Hemisphere rally. Le Metropole Cafe reports that India, the world's biggest gold consumer and a supporter of this rally for most of the decade, is not currently buying. In contrast, India was a major buyer at gold's lows in the fall.

But U.S. dealers, according to their websites, are still bidding well above spot for bullion coin - particularly silver.

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