Silver Meltdown on the Chart

 Silver Meltdown on the ChartIn early 2011, silver was the toast of the town, as speculators ran up the price to the $50.00 an ounce level on speculation that the world economies would explode upward. Of course, this has yet to happen since the white metal steadily declined over the past 15 months. The upward move in prices leading up to $50.00/oz was overextended on the chart and vulnerable to selling pressure, which did happen, so I hope you did not chase the metal higher.

The long-term chart of cash silver from 2003 shows the metal managing to hold just above its 50-day moving average (MA) around $25.00 per ounce. The last time cash silver traded below its 50-day MA was briefly in late 2008 and early 2009. We are seeing a sideways trading channel between $25.00/oz on the bottom end and just over $35.00/oz on the top end. If silver can hold, we could soon see another rally back above $30.00 toward $35.00.

Yet I would rather be in gold, which is used mainly as a hedge against risk and for jewelry. Silver is used in numerous industrial and electronic applications; hence, it’s more of a trade with the state of the global economy. The same goes with copper. I would not be a buyer of silver now unless you want to trade the sideways channel and buy the metal toward $25.00/oz and sell into strength in the low $30.00 to mid-$30.00 an ounce level.

The July Silver is bearish below the key $30.00/oz level—below its 50-day MA of $29.59 and 200-day MA of $32.24. Chart resistance looks tough, and there’s a bearish death cross.

Now let’s look at the gold-silver relationship from another angle.

The fixed exchange rate between the two metals was 15.5:1 in the nineteenth century, but moved much higher to average 47:1 in the twentieth century. The spot gold price was $1,576 an ounce on June 27 compared to $26.91 for spot Silver. This equates into a current gold-silver ratio of 58:57, which means the price of gold could fall further to the average—implying a gold price of $1,264/oz, down another 19.8%. Of course, silver prices could also be undervalued based on this ratio and head higher, but I’m not convinced of this.

Europe continues to show slow growth, and there are breaks within several eurozone countries, including Spain, Portugal, Italy, Greece, and Ireland, about which you can read in “Global Economies Backtracking.”

China is facing its own slowing and potential asset bubble.

These are not ideal variables for silver.

Also don’t forget about the mounting debt and deficit in the U.S. The country has close to $16.0 trillion in debt and is paying billions in interest daily.

In my view, the global risk offers more opportunity to make money on gold.