Whats Next for Silver?

June 4, 2013 at 09:51

truthing

Where silver is trading today represents a 35% decline from six months ago – which has led many investors to bail on the white metal in 2013.

Silver prices hovered around $22.78 in trading today in New York, almost $10 lower than where they started the year.

Here Global Resources Specialist Peter Krauth talks about what investors should make of where silver is trading today.

While Krauth remains bullish on both silver and gold over the long term, he does see prices possibly falling a little more before a reversal.

“I do believe that most sellers have exited silver – but not all,” Krauth told us Monday. “Since I’m still bearish on gold for the near term, I expect silver would simply follow gold down on any weakness.”

Many investors have bailed on the white metal thanks to chatter over the end of quantitative easing, low (reported) inflation and record stock market rallies.

They’ve also been spooked by lower price forecasts from analysts at Bank of America and Barclay’s.

Deceleration in global industrial activity, a steady recovery in the global economy and a drift away from traditional safe haven metals were cited for BAC’s lowered forecast. Barclay’s pointed to a silver surplus that will weigh on prices.

Following a frenzied rush for silver in April, investment demand for popular American Eagle silver coins has waned.

Premiums charged by wholesale dealers on the coins (retail investors’ silver investment vehicle of choice) dipped 13% in May, down from April’s four-year high of 25%, BloombergNews reported. U.S. Mint Website data shows sales of Silver Eagles in May slumped 15% from April.

The recent drop-off, however, could also be attributed to depleted supply. Sales jumped to a monthly record in April causing the Mint to ration supply to dealers. Nationwide, sold-out inventory are the norm.

Another factor that’s led to reduced silver buying is tame inflation.

With recent government-reported inflation numbers sitting well below the Fed’s 2% target, investors are no longer purchasing silver as an inflation hedge. The Fed aims to keep inflation stable at around 2%, a level central bank officials believe supports steady economic growth and hiring.

Minutes from the Federal Open Market Committee’s (FOMC) latest meeting made it quite clear that QE will be winding later this year or early next. Whispers of a winding down have investors hitting the exits.

But betting on more declines for silver is a risky game.

Tom Essaye and Jim Woods wrote for Marketwatch that according to the Commitment of Traders (COT) report, the last time the number of silver shorts were at the current level for more than a week or two was July 2012.

Also happening now similar to July 2012 is a wide gap between short contracts and long positions. This represented silver’s lowest price in 2012.

Within eight weeks of the high shorts in July 2012, silver was up 30%.

Another notable chart for silver prices right now: the gold/silver ratio.

where silver is trading today

“Interestingly, the gold/silver ratio is high at 62 right now,” noted Krauth. “It hasn’t been at these levels since late 2010, when silver started shooting higher from about $17 to peak around $48 in April 2011. It could still go higher, but it should cave to pressure and head downwards over time. That should mean higher relative silver prices.”