Montreal, Canada

Gold-bugs are celebrating this morning as the King of hard money continues to hit new all-time highs in 2010 amid a flurry of buying from all corners of the market – including central banks and investors. The Indian wedding season is now approaching in earnest as demand for gold rises across the world’s second most populous nation.

Silver should be closely monitored at this juncture as it approaches an important resistance level.

If silver can close above its March 2008 high of $20.78 an ounce, then another dose of bullish fever will be thrown at the ongoing bull market in precious metals. Silver has trailed gold since 2000 but has begun to outpace its bigger brother since August.

Now in its 10th year, gold and silver prices have risen 364% and 314%, respectively, since September 2000.  That compares to a cumulative decline of about 4% for the S&P 500 Index, including dividends.

Silver opens this morning at $20.46 an ounce, just 1.5% below its March 2008 high. Silver hit an all-time high back in January 1980 at $49.45 an ounce; adjusted for inflation over the last 30 years, the real silver price belongs around $127 an ounce.

Above ground supplies of silver continue to decline. Like gold, supply has barely kept pace with demand over the last several years as the cost of bringing new mines into production rises exponentially; it’s much less expensive to buy an active property than to develop one.

With gold and silver ready to bust loose this fall amid seasonal strength, the mining stocks are poised to finally outpace bullion. Gold stocks have trailed gold bullion since 1996. But I suspect that relationship will change dramatically over the next few years as high gold prices leverage producers’ earnings far above market expectations.

For now, Gold-bugs are rejoicing.

However, gold and silver are over-bought at these levels and sentiment combined with technical indicators point to another correction. I would not buy gold stocks at these levels. Use any intermittent short-term weakness as another buying opportunity as gold heads to over $3,000 an ounce and silver tops $75 in this bull market.