Where's Gold Headed? Ask Silver
Source: Fortune, Nin-Hai Tseng (9/30/10)
"Recent moves in the silver price suggest an end to gold's rally."
Gold futures for December delivery closed Wednesday at $1,310.30 an ounce on a weaker U.S. dollar and expectations that officials will pump more money into the sluggish economy.
While silver futures are still much cheaper closing at $21.95 an ounce, they have outperformed gold on this recent run. Silver this year has jumped 30%, while gold has climbed about 19%. At one point on Wednesday, silver reached its highest level since October 1980, at about $22 an ounce. Historically, when silver catches gold or even surpasses its rate of growth, it indicates the nearing end of the rally.
History has shown that silver becomes increasingly viewed as an alternative to gold when there isn't much certainty in the economy. And many investors these days, as Fortune's Colin Barr points out, have lost faith that U.S. lawmakers will decide on pressing issues surrounding jobs, deficits and taxes.
With silver's rise, it seems virtually everyone is bullish on precious metals—and that's typically when reversals take place. Also, the fact that gold and silver miners have yet to see record prices translate into profits has helped raise red flags to some investors.
"Caution is the word of the day," says Patrik Sharma, managing director of Atyant Capital, a hedge fund focused on gold. Despite the rise in silver, Sharma thinks prices for gold will continue to rise over the next 10 years.