Charting Asia

Chart: Watch gold prices to profit from silver

David Muir | Getty Images

Gold prices are up 25 percent in 2016 while the surge in silver has seen prices rally 46 percent this year. Early in 2016, the silver price behavior stopped leading the gold price behavior. Silver reverted to its previous behavior of following the gold behavior but it has remained a very profitable trade.

Silver has an upside target of $26.00. That's 30 percent higher from the current price near $20.00. Gold has an upside target near $1580, which gives a 16 percent gain from the current price near $1360.

Silver is slower to move but it has more room for an upside and this delivers better profits. In March we suggested the smart trade was to look at gold, and then execute the trade in the silver market. It has been a good trade with silver replicating the strong breakout in gold prices.

The silver chart has 3 fan trend lines compared with the 5 fan trend lines on the gold chart. The fan pattern in silver is not as strong but the breakout gathers extra strength because it follows the gold price. (Note the silver price is shown in cents)

The Guppy Multiple Moving Average (GMMA) indicator confirms the strength of the silver price breakout. The long-term GMMA group of averages has compressed and has turned up. This is a slow and steady pattern and it is typical of a strong and sustainable trend breakout. The short-term group of moving averages has moved decisively above the long-term group. The short-term group is well separated showing strong support from traders.

The first resistance level is near $18.70. This has been decisively broken. The price is now testing the weak resistance level near $21.00. A breakout above this level has a long-term target near $26.00.

The similarity in the patterns on the gold and silver charts means the silver price follows the behavior of the gold price. The best trade is to watch gold and execute the trade on the same price move in silver.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available from He is a regular guest on CNBCAsia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.

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