Silver Miners To Love Reflation?

“Every love story needs a catalyst of some sort.” - Ian Somerhalder

I've been noticing meaningful improvement under way in Silver (SLV) relative to stocks in recent weeks, writing about the idea that forced reflation to come from SuperBen and the League of Extraordinary Bankers could cause a rush into precious metals once again. Silver has been a poor performer since April 2010 as CME margins were hiked and volatility increased amongst last year's deflation scare. Stocks performed comparatively better than the metal, particularly as China itself has slowed down and as the U.S. dollar itself has caught a bid on the Euro crisis.

As I said recently only Bloomberg, if reflation does not happen organically, central bank paranoia will make sure it happens. This would be beneficial for stocks and commodities, and presumably those investments with exposure to both.

Take a look below at the price ratio of the Global X Silver Miners ETF (SIL) relative to the SPDR Dow Jones Industrial Average ETF (DIA). As a reminder, a rising price ratio means the numerator/SIL is outperforming (up more/down less) the denominator/DIA. A falling ratio means the opposite.

Silver Miners have effectively gone round-trip, undoing all outperformance generated relative to the Dow Jones Industrial Average since April 2010. The relationship is now sitting around an important support level, which it has test four times. While the trend remains lower, there appears to be a high probability long trade in the making here with a potential sharp snap-back in strength as a result. The catalyst might just come from Draghi and Bernanke, soon to come.

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