Commodity Corner
Turning to silver and its own sharp drop this year we can see from the chart below that silver in fact experienced a parabolic rise going into 2011, running from just under $10 per oz to almost $50 per oz in a little over two years. By any stretch, it certainly had gotten ahead of itself. But similar dynamics in the physical market are at play presently in silver in that real underlying demand for the precious metal is at record levels.
What this means is that if the one sided bull positioning has been wrung out of the futures market, then the risk reward equation is back on the bulls side. In fact, the recent data from the COT (Commitment of Traders) data shows a very material reduction of speculative positioning in both gold and silver futures. In short, speculative froth has been taken out of the market.
SILVER 10 YR CHART Here’s another chart we think interesting and that is an historic representation of the price of silver relative to gold. When the ratio is high it means that silver is undervalued and/or gold overvalued relative to each other and vice versa when low. The blue line represents the rough and ready mid range over the last 10 year period.
62 | www.financial-spread-betting.com | May 2013
You can see we are now modestly on the cheap side relative to gold. Any further weakness in silver relative to gold and this could present a good pairs trade opportunity and so a lower-risk way to play the market as you would be long silver and short gold.