Silver Breaking Out: Short-Term Pullback Likely, Long-Term Prospects Strong

Silver has now advanced by 21.25% in the last 5 trading sessions. The breakout has been nothing short of astounding, and it will be interesting to see if the precious metal can continue its breakneck pace.

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The fundamental reasons for silver's advance are many, including the reintroduction of quantitative easing by the Fed (aka QE2), and the general loss of faith in the traditional major currencies. The chart below shows silver against both the Australian dollar and the Canadian dollar.

Both Australia and Canada are natural resource-rich countries, and their currencies tend to move with that of commodity prices. As can be seen from the chart, after a few false breakouts, silver, the Australian dollar, and the Canadian dollar are finally breaking out at the same time. As the world continues to lose confidence in the growth rates of the US, the Eurozone, Great Britain, and Japan, investors are increasingly seeking out countries like Australia and Canada to store their cash.

By comparison, Australia and Canada have very low unemployment rates compared to the US (5.10% for Australia and 7.9% for Canada compared to 9.6% for the US). Australia's currency is also yielding 4.75% compared to the US target rate of 0.25%. Given the US and other developed economies' need to print money to support risk assets in the absence of real economic recovery, currencies like the Australian and Canadian dollar should continue to outperform.

Along with resource currencies, silver and gold will also outperform. Just as the resource currencies are an attractive place for investors to store value, precious metals have traditionally been a hedge against inflation and major currency devaluation. With the Fed's penchant for printing money and keeping government bond yields artificially low, investors will have to continue to purchase precious metals in order to hedge their portfolios against possible inflation.

While the current trajectory of silver makes a short-term pullback likely, the long-term prospects of the metal continue to be strong. We will continue to be long silver, and add to our position on pullbacks.

Disclosure:

Author is long silver and gold futures, the Australian dollar and the Canadian dollar

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