Silver - it will out perform gold if the bullish trend continues

Silver will out perform gold in the longer term. So, I am overweight on Silver than gold in my precious metals portfolio.

It will be a surprise to many traders that while trend for precious metal is extremely strong, there are contrarian speculators that short the market. These are big institutions consist mainly the big banks. Conspiracy theory surmised that they are government agents used to subdue the price of gold.

Speculations put aside and lets get the facts. The latest report shows that JP Morgan now holds 200 million net short in the COMEX future. This is a 40% of the entire short of COMEX.

In total, there are 500 million ounces or 100,000 contracts in silver shorts at the COMEX. To put this in perspective, this is equal to 75% of annual world production of silver.

Something has to happen. This has been going on for a while. Similar situations happened with Gold and a lot of times, these commercial institutional traders won the game in the past times when gold prices surged.

It could be different this time if:

· The strength of the bull or the demand for gold and silver is so strong that it overwhelms the effort of these institutions to bring the price down. If it happens, it could send gold and silver prices to the moon

· Industrial demand for silver continues to increase. If there is a need for physical delivery, there may be no way to hide under the cover of paper shorts

The situation is creating stress to the system. It is historic. It may even have the remote probability to cause COMEX to shut down. If the bull wins, price for precious metal will explode.

Therefore be careful of ETF and paper futures. If the remote possibility of COMEX having to shut down, it could cause great problems to ETFs and futures.

It is better to stick to physical gold and PM related stocks if you are thinking of riding the bull.

The overall trend is in line with what I expect. It is a healthy correction for precious metals. Precious metals will continue to go up but silver will outperform gold by a ratio of 2:1. It has happened this year and it will happen in 2010. It is more volatile and need more management but more rewards.

Gold seems to have bottom at 1100. If it falls below 1080, another correction to 1040 is possible. I will add short calls. If it falls below 970, it is then a false break out so far. I will add my puts for protection. This is how I profit the profit I had so far since November.

Although I am bullish, anything is possible.