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Gold gets the headlines, but right now the outlook for silver stocks is brighter. In fact, the relationship between the two metals suggests that silver could provide more bang for the buck.

Earlier this month, I wrote that the iShares Silver Trust exchange-traded fund (ticker: SLV ) was poised to break out to the upside through three different trendlines. The trigger level was about $15.20 on the ETF, which equates to a price of about $16.20 for spot silver. That level has not yet been breached, but technicals from moving averages to cumulative volume remain bullish.

The case is even more compelling when we look at how silver-mining stocks are performing this year. The Global X Silver Miners ETF ( SIL ) has already broken through a set of similar trendlines with strong volume and momentum readings. And it is up roughly 80% since its January low (see Chart 1).

Chart 1

No doubt, the sector experienced a brutal bear market after precious metals peaked in 2011. Signs that conditions were starting to change became visible in January, however, even as the ETF set an all-time low. Downside momentum was already on the wane, suggesting the bears were getting tired. And when a support breakdown was negated in February, it confirmed that sellers were no longer in charge.

Silver Wheaton ( SLW ) is the largest holding within the SIL fund, and its chart looks very similar. Indeed, many stocks in the group have similar patterns, including Pan American Silver ( PAAS ).

Strong stocks often lead improvements in their related commodity. Therefore, the positive outlook for silver is supported on several levels. To be sure, the commodity would face headwinds if the U.S. dollar were to pull out of its recent decline. But that might just be a drag on silver’s rally rather than a ceiling.

Another clue to the underlying strength in silver can be found in the iShares MSCI All Peru Capped ETF ( EPU ). Peru is the world’s third-largest silver producer, and its stock market ebbs and flows with silver prices (see Chart 2).

Chart 2

Although this ETF is not heavily traded, what volume it does get is heavier on rally days. In other words, volume characteristics suggest bulls are more aggressive than bears. Certainly, price action agrees; EPU has had a nice move up through its 200-day moving average and a 49% gain since the lows of January.

While the fund is now bumping into a three-year trendline, the technicals suggest only a pause at this time before a breakout attempt.

Many analysts compare the price of gold with the price of silver to get a handle on relative value. The gold/silver ratio is currently near 80, which is close to a seven-year high (see Chart 3). Compare this with its historical average, near 60, calculated from the start of the precious metals bull market in 2001. That suggests the ratio is stretched too far to the upside and more likely to move lower than higher. Of course, that does not guarantee that the reversal will begin immediately, but it does tell us about the environment for both metals.

Chart 3

Look for a break of the trendline drawn from 2011 to signal a confirmed change in direction for the ratio. Even without that signal, silver seems to have enough bullish technical factors behind it to suggest it will perform better than gold over the next few years.

Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We’ll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

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