Silver shines

The US Dollar Index, which measures the currency's performance against six of its biggest trading partners fell to its lowest point since 1973 (the year of the oil crisis) of 74.48 on November 23. Gold has gained approximately 25% this year, heading for its seventh straight annual gain. Silver, however, has lagged behind gold with a gain of 10% up till now.

Speculative silver

One of the reasons could be that silver is seen as a more speculative asset than gold. In times of uncertainty and/or inflation, people normally buy gold and to a lesser extent silver.

Gold and silver 'exploded' from the bottom in August, on the back of a further weakening of the dollar. The Federal Reserve (Fed) reduced interest rates aggressively from 5.25% to 4.5% to cure the credit crisis. This hurt the dollar even more and the end of the rate cuts is still not in sight. Indeed, the Fed may well cut the US benchmark interest rate again today, December 11.

The likelihood of a 25 basis point Fed cut increased to 74% after the Labour Department in Washington said payrolls rose by 94,000 in November. Although this number is stronger than expected, Ben S. Bernanke, the Fed's Chairman, is more focused on the tight credit market.

The Fed is acting like a fire fighter, desperately trying to extinguish the subprime 'fire'. Reduced borrowing costs erode the value of the dollar and spark demand for precious metals, which are seen as an alternative investment. If the dollar weakens more, it could buoy demand for gold and silver.

A silver lining

The question is whether gold will benefit from a further rate cut. Gold is struggling with breaking through the $800 barrier. Gold could retreat from this level because of profit taking. At the moment, I would put my cards on silver, which is now testing support around $14.

Silver has broken out of a long term triangle-pattern which has been going on since 2006. The target is approximately $18 on the long term. My estimation is that silver could rally to my first target of $16 - a previous November high. In the meantime, I would put my stop-loss at around $13.50 and then get out since a close under this level implies a failure.

Be aware that silver is a highly speculative asset. Quick money flows in and out like water. We will see what ride silver takes: a bear or a bull ride. For now, I would go for the bull.