|CPM Group: Silver Market ‘Extremely Vulnerable’ To Sharp Decline; Gold May Also Fall
02 May 2011, 01:25 p.m.
(Kitco News) -Market developments suggest that silver prices have been in a “bubble-like spike” during the past few weeks on short-term investor buying and are “extremely vulnerable” to a sharp decline, and gold could also fall sharply, according to a market Alert issued Monday by CPM Group, the New York-based metals and commodities consultancy.
July silver, at last week peak of $49.84 an ounce on the Comex division of the New York Mercantile Exchange, was up 61% for the year after a strong 2010. The market has been volatile since, pulling back as far as $42.20 in overnight screen trading before recouping much of the day’s loss.
While silver has reached 31-year highs, gold has hit an all-time peak. June gold got as high as $1,577.40 overnight.
“How far could silver decline?” the CPM Group report asked.
"Silver could fall $12 or more, to around $37 or lower, very quickly," the market alert said. "Such a sharp retracement seems more likely than not at this point. No asset in history has risen so sharply so rapidly and retained most of its price appreciation. Silver has no immunity to the laws of the market."
CPM Group said the material included in the market alert was due for release on Thursday in the May Precious Metals Advisory. But it said that because of the volatility in the market "and our expectations that gold and silver prices could decline sharply between now and Thursday, we are releasing this commentary early."
CPM said prices for both gold and silver had been expected to rise sharply during May, with anticipation that gold could hit $1,550 an ounce before falling back toward $1,360 by the end of June. Silver was projected in CPM's April Precious metals Advisory to possibly spike to $42 during April and May before plunging back to $28 by the end of June.
"Gold touched $1,569.80 intraday on the Comex Friday 29 April, while silver briefly touched $49.56 intraday on Thursday 28 April, " CPM said in the market alert.
The consultancy said prices have risen for three main reasons. First, CPM said, investors have been pouring into silver and gold out of concerns over the course of the U.S. dollar, which has been plunging in value back toward levels last seen in late 2009 and early 2010. Inflation concerns and other economic and political worries contributed to this fall, the report said.
A second factor which was significant to the rise of prices during April was "a tremendous surge in short-term investor buying," or speculative demand, CPM said.
A third important element was the roll out of the May Comex silver futures contract over the past several weeks, CPM said. This caused the trading entities that were short the May contract "to either roll their May positions forward, buy them back and walk away from the futures markets, or buy physical metal and deliver it into the Comex," according to CPM's market alert.
"Virtually all of the resolution of the high May contract open interest going into April has been through traders and speculators rolling their positions forward," CPM said. "Very little of the positions have been held into the May delivery period, which began Friday 29 April, and no metal has been delivered into Comex depositories to meet the delivery requirements."
CPM said the indications that much of the buying during April was by shorter-term investors who reasonably would be expected to sell once prices stop rising and start falling. "Many of these investors have been momentum-based traders, technically-based traders and short-term investors, " CPM said n the report. "Buying in the silver exchange traded funds (ETFs) has not been spectacularly great over the past month. Nor have there been reports of exorbitantly large silver purchases in the physical markets."
The market alert said such short-term activity pushed silver prices sharply higher.
"It is possible that some of these shorter-term investors might take any price dips, such as was unfolding in the Asian markets on Monday morning, as buying opportunities," CPM said. "It seems more probably that many of them would dump their recent purchases. Other investors may well wait to see how low silver prices fall before starting to buy again."
By Terry Wooten of Kitco News firstname.lastname@example.org