Blogs & Comment

The silver bubble

As silver prices soar, experts warn a correction is coming down the pike.

With silver prices soaring (in April, futures approached US$50, a 31-year-high), some observers are making a lot of noise about how this may be only the beginning for gold’s poor cousin. But there’s also reason to believe that a significant correction may be coming down the pike. In recent days, one of the most convincing arguments came from UBS, who published a research note on silver entitled “Defying gravity,” which argued that the grey metal is being pushed into “bubbling territory.”

In the report, the bank’s analysts explained that, “On the back of firm industrial demand, financial demand has been able to balloon prices,” and warned that in the next year, prices could fall to as low as $34. This logic is in line with the vast majority of experts that I interviewed for my feature in the latest issue of the magazine entitled “Hi, Yo, Silver!” which hit newsstands today. When I spoke to Peter Zihlmann, a Zurich-based investment fund manager, a few weeks ago, he too warned that the silver price was over-extended. “If gold continues higher, silver will also go higher, but at some time I do believe that there will be some sort of correction.” Bill O’Neill, a N.J.-based principal of Logic Advisors, concurred. “The potential for volatility is absolutely huge,” he said. “Any position that you would take in silver should be a cautious one.” This point was reinforced following the death of Osama bin Laden, when silver futures fell by 6%, the biggest dip since 2008.

All of which suggests that sun may be about to set on silver’s (ahem) golden age. But it certainly will have been fun while it lasted.

UPDATE: Well folks, it appears the naysayers were right. This week, a series of margin hikes in the silver futures market prompted a dramatic sell off, triggering the biggest plunge in silver prices since 1980. On Friday morning, spot silver was trading at $35—a nearly 30% drop since April 28.  Though silver rebounded by 1% on Friday following its biggest one-day drop in three decades, it looks like the bull run may be over. As “It’s going to be a long time before silver can find a bottom to turn higher again.” Dennis Gartman, publisher of the Gartman Lette, told Reuters. “When you have this kind of damage, it will take several weeks or maybe several months for people to be taken out, and for confidence to be rebuilt.”