The enclosed weekly chart of the gold/silver ratio shows that from mid-April 2011 to late-December 2011, gold prices outperformed silver within a period of overall precious metals weakness. The pattern carved out during the April-December period exhibits a very bullish structure, which implies that a new bull leg has started in the gold/silver ratio -- led by gold.

That said, the recent (current) three-week pullback in the ratio from 56 to 52 represents a minor correction (silver is outperforming gold at the moment), which when complete should resolve itself in a very powerful thrust to the upside that hurdles key resistance between 56.00 and 58.00.

Should such a scenario unfold as expected, the surge in the ratio will be led by a very powerful upmove in gold, while silver lags.

That is why I prefer to be long silver equities -- i.e., Silver Wheaton (SLW) -- and long the metal in gold in the form of the SPDR Gold Shares (GLD).

 

Mike Paulenoff is a 26-year veteran of the financial markets and author of MPTrader.com.