Silver Rises Higher In Gold's Shadow

07 September 2010, 4:30 p.m.
By Debbie Carlson
Of Kitco News

Chicago -- (Kitco News) As gold inches closer to its all-time nominal high from June, silver futures prices broke through the $20 an ounce barrier on Tuesday, and market watchers believe the gray metal has higher prices in its sights, if investment demand can sustain its growth.

Although silver was unable to sustain the gains, the most-active December futures contract on the Comex division of the New York Mercantile Exchange punched through $20 in early day-session dealings before pulling back and settling at $19.80.. A stronger dollar and weaker outside markets, such as crude oil and equities, pressured silver. Silver is trading at prices not seen since March 2008.

A pullback isn’t entirely surprising for a notoriously volatile market. Silver is a much smaller volume market than gold, so it can be subject to sharp moves. MKS Finance said silver fell on profit taking after it was unable to continue pushing through $20.

Silver prices over the past two weeks have rallied sharply, following the gains in gold as the metal benefits from safe-haven buying. Since Aug. 24 when Comex silver prices settled at $18.428, prices have been on a swift rally. Speculator buying has been behind the rally and open interest has grown, suggesting these market participants are putting on new long positions.

The weekly commitment of traders report from the U.S. Commitment of Traders showed managed-money speculators increased their already-long positions by another 11,873 gross contracts to be net-long 39,499 contracts for the week ended Aug. 31. These are the most long positions they have amassed since May. As of Friday, Comex silver open interest was at 138,248, up from 130,072 the previous week.

Market watchers said it’s not surprising to see silver and gold rallying together, as they are now. “Silver sometimes is treated like the little brother that gold drags around. But silver is acting like a blue collar safe haven,” said Mike Daly, metals specialist at PFGBest.

Silver is benefitting somewhat from economic worries about fiat currencies and the lure of tangible assets in uncertain times. As gold prices go higher, some investors turn to cheaper vehicles, which is where silver gets its boost, Daly said. “I like silver because it has more bang for the buck. Gold is at $1,258, silver is at $20. I expect it to outperform gold,” he said.

Carlos Sanchez, associate director of research with CPM Group, said what helps silver is also keeping prices in check. “Silver has support as an investment vehicle, and anything that is a concern economically or politically will support it. A factor that will keep a lid on it is reduced demand for industrial metals because of slowing economic activity,” he said.

Both Sanchez and Daly see prices rising in the next weeks and months, primarily because of investment demand and technical-chart based trading. Breaking through to $20 for the first time meant cutting through some steep chart resistance, Daly said. Sanchez said $21.50 to $22 is the next near-term target and Daly said if prices can reach $21 values can move to $25. Still, Sanchez said for silver to rally successfully it will take a sustained close above $20 to encourage the move.

Analysts at Commerzbank said in a research note Tuesday: “If the $20 hurdle is taken, additional buying interest would be likely. Furthermore, silver is still reasonably priced in relation to gold, at a gold/silver ratio of 63.”

In any heavy profit-taking breaks, Sanchez said $19 is first support, with strong support at $17.

Barclays Capital said as long as gold rallies, silver will likely follow. It added that investment demand for silver is paramount as fundamentally supplies are still in a surplus. If investment demand fails, prices could fall swiftly.


By Debbie Carlson, of Kitco News;

Editor’s Note: Meet the Kitco News Team at the upcoming Kitco Metals eConference September 12-13, 2010. A not-to-be missed event featuring Ron Paul, Marc Faber and other industry heavyweights. The eConference is free with Pre- Registration