Silver Looking Likely for Further Falls

The current silver market illustrates the value of spread betting as an indication of future price trends.

Of course, this depends on the herd mentality holding sway — that a growing number of long bets means the price will rise and a growing number of short bets means it will fall. But by the very nature of markets, more often than not it is the herd that creates the momentum in one direction or another and a brave person that bets against it.

Spread-betting company CMC Markets said last week that clients had become increasingly bearish on silver. In November 2010, 79 percent of clients’ money on silver was going long; by late December, 67 percent was going short. Nor are the spread betters alone: according to Standard Bank, net speculative length for COMEX silver continued to drop, with 93.9 tons shed over the past week. After the previous week’s massive fall of 995 tons, the bank concludes the mood is still decidedly bearish.

The decline was mostly attributable to a further increase in speculative short positions (93.2 tons). Net speculative length, currently at 1,772.8 metric tons, has reached a new low for 2011, while total short positions are at a high for 2011 at 2,217.4 metric tons. Mirroring Comex, the ETF market is also showing aversion to silver by investors. Last week saw 98.4 tons shed from ETFs, compared to only 57.2 tons lost in the previous two weeks. ETF holdings now stand at 17,877.8 tons, down 838.8 tons for 2011.

Looking Ahead

Precious metal-focused investing publications still report a medium- to long-term commitment to gold and silver as a hedge against expected inflation in the years ahead, and they may well be right to do so. But in the short term, although gold is looking a little healthier, silver is looking less so.

Although physical silver demand — as evidenced by American Eagle sales — hit a record high last year, it must be remembered such data is ‘rear-view mirror.’ For some of last year, the silver price was rising strongly, and outperformed all other precious metals in terms of average annual price increases to reach $35.12/oz, according to The Silver Institute. Since reaching a high of nearly $50/oz in 2011, the price has come off sharply and is currently languishing around $29/oz.

Investors appear to be betting, at least in the short term, that it has further to fall.

–Stuart Burns

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