Could gold drag silver back up again?
SILVER BEGAN a wild and relentless climb since last August. Now some high-profile investors have started taking profits. Does that mean the silver bull market has peaked? asks Peter Krauth writing for Money Morning.
In a word: No.
Don't misunderstand: We could still see additional declines in the Silver Price.
After that, however, we can bank on the silver bull resuming for the very simple reason that we can identify the three specific factors that have caused silver prices to fall. And all three of those factors are as rational as they are finite.
Now, I'm as much of a silver bull as anyone. But when I look at the 20% decline Silver Prices have experienced in the past several days, I can attribute the drop to the following three reasons:
- Silver prices rose a long way in a very short time, making them vulnerable to downward pressure from other catalysts.
- The exchange on which silver trades made it tougher for traders by boosting margin requirements several times starting last week.
- And several high-profile investors have reportedly sold silver, exacerbating investor nervousness.
The Comex division of the New York Mercantile Exchange – where silver futures are traded (both of which are part of the CME Group Inc. (Nasdaq: CME)) – on Monday decided to raise the margin requirements on silver by 12% (the increase went into effect the next day). That came on the heels of two previous increases - of 9% and 10%, respectively - that were implemented last week.
Last week's increases in the margin requirements for silver failed to quell the exuberant trading. But Tuesday's 12% increase may have done it.
You see, gold is purchased and held predominantly by big institutional investors, investment funds and even central banks. But silver is actually dominated by individual investors. And when the exchange increased the requirements for trading silver-futures contracts, a number of those individual investors were forced to liquidate their holdings.
Yet something, perhaps even more significant, also took place recently...
In recent days, a number of high-profile silver investors have sold the metal – further unsettling already worried individual investors holding silver.
The fact that the "well-heeled" were exiting silver "put fears in people's minds," Adam Klopfenstein, a senior market strategist with Lind-Waldock in Chicago, told MarketWatch.com.
The Wall Street Journal reported late Tuesday that such well-known investors as George Soros and John Burbank have been selling off their gold and silver holdings recently. Those sales have contributed to the recent price declines for these precious metals, and could threaten the nine-month rally gold and silver have experienced.
And Soros and Burbank weren't alone in their decision to sell.
Eric Sprott, of Canada's Sprott Asset Management LP – which has a total of $8.5 billion under management, and which is also one of the biggest silver bulls – cashed in $35 million of his own Sprott Physical Silver Trust ETF (NYSEArca: PSLV).
It's likely this news hit the silver market, too, exacerbating the sell-off.
In an interview with Toronto's Globe and Mail newspaper, Sprott explained that he's still very bullish on silver. He told the business daily that "Every Dollar of money that was raised by selling shares of [the Trust] ... was reinvested in silver or silver equities."
What's more, PSLV was trading at a 16% premium to its net asset value (NAV). So right near an interim top, Sprott recognized the relative value (versus his own silver ETF) in both physical silver and silver equities.
The trade by this savvy investor – cashing in the overvalued to reinvest in the undervalued – is a perfect example of how the smart money behaves, and why the contrarian investor often comes out on top.
Sprott also indicated that he's not ditching his trust, and that he continues to own 25% of PSLV, allocated between his various investment funds and charity.
Even though such investors as Soros, Burbank, and Sprott have sold silver and silver-related holdings, a number of other experts continue to favor gold and silver. We mention gold because silver remains the yellow metal's crazy cousin.
Hedge-fund legend John A. Paulson – who solidified his place in investing lore by shorting the subprime mortgage market – continues to believe in gold and silver.
And Paulson is far from being the only one. In a column published just yesterday, for example, Brett Arends, who writes for both MarketWatch and The Journal, made a highly compelling case that gold has yet to top out – and could actually "go vertical" from here. Arends made a compelling case, as did some of the institutional players he spoke to.
If gold were to skyrocket, silver would move as well.
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