Silver breaks out

Silver broke sharply out of its five-week trading range Friday, closing at $14.28, up 2.7%. RSI has broken its downtrend, and MACD is in the process of breaking its own.

The metal appears to have enough momentum to resume its uptrend with a vengeance and may test last February's high of $14.89 within weeks, possibly before the end of the year.

Silver's leap managed to eclipse gold's jump to $787.50 Friday — a mere 2.14%. Gold's RSI and MACD have also broken their uptrend lines, clearing the way for gold to continue its climb.

Will silver now begin to pull ahead relatively to gold? And will that be a good omen for the longevity of the gold bull?

During the rally since mid-August, silver has on the whole kept pace with gold, though it has underperformed the yellow metal recently. This may change, as RSI for the $SILVER:$GOLD ratio has risen above 50, and MACD appears to be ready to make a bullish crossover.

The implications are mixed. Although if silver begins to outperform gold it will be a cause of cheer for those who believe that is the normal state of affairs during a precious-metal bull, Adam Hamilton's research shows that is a myth. He points out that silver tends to lag gold in the early stages of a bull move and only outperforms it in the final, most speculative stages of the ascent.

This observation can be seen to be borne out by an examination of the rallies that ended in spring 2004 and spring 2006. Silver at first lagged, then overtook gold only in the latter part of each rally to make a significantly higher peak, in percentage terms, at the very end.

In any case, silver has a bright future over the next several years, according to analysts at RBC Capital Markets cited here. They argue that three fundamental factors will support the price:

First, the continued baseline outlook for a weaker US dollar, which would underpin higher precious metals prices in general. Second, fundamentals for silver are seen as remaining positive, with demand increases for industrial and investment segments forecast to more than offset continuing decline in photographic demand. Third, concerns over increased primary silver supply is seen as remaining a few years out, as remain analysts' expectations for increased by-product silver supply resulting from high price levels seen in gold, copper, lead and zinc.