Twisted Titan
1st May 2011, 07:01 AM
By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) — After silver’s impressive climb toward $50 an ounce, it would be difficult for anyone to believe the rally in silver is nearing an end, but it just might be.
What goes up must come down and for silver, known for its volatility, the more than 50% price spike year to date may be too good to be true.
After all, analysts and traders alike have been singing the praises of silver for years, and now that tone is changing.
We’re concerned because the rate of ascent in silver prices keeps accelerating,” said Mark Thomas, chief investment strategist at TheSilverShortage.com, which offers a newsletter about silver and silver mining investments. “A parabolic move like that can ruin any bull market short term.”
“Silver can make for happy buyers on occasion, but also for despondent ones more often than not,” Nadler said. Silver has “no business in or near the $50 an ounce region. It has been pumped up to these levels by the funds and I think they might get their hands slapped soon over this one.”
Buying craze
The mere mention of China’s or India’s interest in silver appears to have contributed a lot to silver’s rally. That may just be the red flag investors should be watching out for.
“China is now a net importer of silver from being a net exporter of silver over two years ago,” said Julian Phillips, an editor at SilverForecaster.com, adding that the country has actively encouraged the development of a country-wide distribution system for gold and silver.
China’s imports of silver quadrupled in 2010 to a record 3,500 metric tons, according to various news reports.
“There are stories around that Chinese retail buyers love silver as ‘cheap gold’, and you know what they do when they get seized by mania — even worse when they lose interest,” said Christopher Ecclestone, a mining strategist at Hallgarten & Company LLC, who’s bearish on silver and doesn’t believe the white metal should trade above $30.
Karnani said silver’s rise is all about “retail fury,” — and everyone in India and across the globe now wants to invest in silver.
In India, there is shortage of physical silver due to huge retail demand, premiums in physical silver are very high and, Karnani said, he’s never seen such a huge retail interest in silver. “Once the global retail fury settles down and/or reduces, silver prices will fall to $34.76 and below.”
Lagging shares
Mining shares offer another red flag pointing toward a potential end to silver’s rally, at least near term.
“Silver mining stocks exploded in March and about two weeks ago, stopped going up along with the metal,” TheSilverShortage.com’s Thomas said on Monday. “There will come a time when they are attractive again but at much lower valuations.”
Year to date, U.S. shares of Coeur d’Alene Mines Corp. /quotes/comstock/13*!cde/quotes/nls/cde CDE +0.03% , the largest U.S.-based primary silver producer, have fallen 4.6%, while Canada-based Silver Wheaton Corp.’s /quotes/comstock/13*!slw/quotes/nls/slw SLW -1.10% U.S. stock has climbed 5.2%.
“Silver stocks are flashing a warning sign,” said Sam Subramanian, editor of AlphaProfit Mutual Fund and ETF Newsletters. “Owners of silver stocks are becoming cautious as the risk-reward ratio for owning silver turns unfavorable.”
And with cash costs for producing silver at a new mine estimated at $10-$15 an ounce, according to Ned Schmidt, editor of the Value View Gold Report, “silver is going to come flying out of the ground at current prices.”
Silver is the ‘internet stocks’ of 2011,” he said, emphasizing that the metal is really worth about $16 an ounce.
The CME Group Inc. /quotes/comstock/15*!cme/quotes/nls/cme CME -2.72% has raised the initial deposit required for speculators to purchase a 5,000-ounce silver futures contract several times over the past few months, most recently on Tuesday.
The rise in margin requirements is “the guillotine blade being raised to the top of the structure,” said Schmidt. “The guillotine is about to slam down on those with their heads stuck out in the silver market.”
Cautious approach
Needless to say, silver’s big run has a lot of investors wondering what to do next. As analysts offer advice, the only common factor is caution.
Paul Mladjenovic, author of “Precious Metals Investing for Dummies,” said he still views $100 silver as a “when,” not an “if,” and warns that “silver’s next major correction will fool the pundits into thinking ‘the bubble has popped’.”
It’s still cheaper to acquire coins at $50 for silver than at $1,510 for gold, said Gijsbert Groenewegen, a managing partner at Silver Arrow Capital Management. “Investors might become a little bit cautious but long term there is no issue.”
Doug Lockwood, chief investment officer at Hefty Wealth Partners in Auburn, Ind., said the reward of alternative assets such as silver has been great over a long stretch, but “there is too much risk for very little reward at this juncture/short run and it’s best to take some money off the top” until the market gets a better view over the next couple of weeks on the Federal Reserve’s approach to unwinding the second round of quantitative easing.
So what’s the safest route? Place trades on dips in the silver price rather than chase its extraordinary rally, said Sam Kirtley, chief executive officer of SK Options Trading.
“We are not in a mania bubble phase yet, [but] there is a strong chance we will enter bubble territory soon at this rate, and that is why we are cautious,” he said
“We have now entered just the beginning of the third [and final] phase of the bull market in precious metals” — the phase in which everyone has become aware of the bull market but aren’t yet engaged and involved in it, he said. The third phase is far from over but when it ends, “precious metals will become a bubble with heavy public participation.”
Silver futures /quotes/comstock/21e!f1:si\n11 SIN11 +2.25% spiked 3.4% on Thursday alone to close at over $47.50 an ounce. Prices traded at under $31 an ounce at the end of last year and 10 years ago, the white metal sold for less than $4.50 an ounce. Read about silver’s upbeat prospects two months ago.
Now even The Grandich Letter Editor Peter Grandich, a self-proclaimed former “raging bull” on silver from under the $10 level, is saying “sell all silver holdings.”
“It’s not that it can’t go higher but I can’t first start buying it here, and I learned it’s best to consider selling when you can’t buy anymore,” he said. So, “if you like crowds, feel free to stay on board. For me, around $50 is a lovely destination to get off for a trip now eight years in the making.”
Risky business
In fact, quite a few analysts who have watched the silver market for years are throwing caution to the wind.
Chintan Karnani, chief analyst at Insignia Consultants in New Delhi, said he was bullish at the start of the year, in part, because of silver’s relative underperformance versus gold over the past three years.
Long term, he still expects silver prices to find support as currency markets breakdown, sovereign debt risk rises in the euro zone and other nations and calls for democracy in the Middle East and North Africa grow, with silver seen as a “cheaper alternative to gold for investment.”
Karnani never expected, however, that silver would be near $50 by the end of April.
“I am not bearish on silver. I am only concerned over the pace of the rise of silver,” he said. “For long-term sustainability, silver prices must fall for a week and then rise. If silver prices continue to rise, then a bubble will be formed and silver prices can crash to $25 next year.”
Just how impressive silver’s climb is compared to gold’s. Year to date, silver futures are up 54% while gold futures have gained under 8%.
“Silver has rallied, moving exponentially, while gold is still moving linear,” said Jeb Handwerger, editor of GoldStockTrades.com, in recent newsletters. “I am very concerned that silver may be overheating as the herd tries to force their way into this trade.”
A few analysts go even further and say silver’s not worth $50.
At this “important pivot point” in silver, the question is “sell now, or sell later?” said Jon Nadler, a senior analyst at Kitco Metals Inc.
SAN FRANCISCO (MarketWatch) — After silver’s impressive climb toward $50 an ounce, it would be difficult for anyone to believe the rally in silver is nearing an end, but it just might be.
What goes up must come down and for silver, known for its volatility, the more than 50% price spike year to date may be too good to be true.
After all, analysts and traders alike have been singing the praises of silver for years, and now that tone is changing.
We’re concerned because the rate of ascent in silver prices keeps accelerating,” said Mark Thomas, chief investment strategist at TheSilverShortage.com, which offers a newsletter about silver and silver mining investments. “A parabolic move like that can ruin any bull market short term.”
“Silver can make for happy buyers on occasion, but also for despondent ones more often than not,” Nadler said. Silver has “no business in or near the $50 an ounce region. It has been pumped up to these levels by the funds and I think they might get their hands slapped soon over this one.”
Buying craze
The mere mention of China’s or India’s interest in silver appears to have contributed a lot to silver’s rally. That may just be the red flag investors should be watching out for.
“China is now a net importer of silver from being a net exporter of silver over two years ago,” said Julian Phillips, an editor at SilverForecaster.com, adding that the country has actively encouraged the development of a country-wide distribution system for gold and silver.
China’s imports of silver quadrupled in 2010 to a record 3,500 metric tons, according to various news reports.
“There are stories around that Chinese retail buyers love silver as ‘cheap gold’, and you know what they do when they get seized by mania — even worse when they lose interest,” said Christopher Ecclestone, a mining strategist at Hallgarten & Company LLC, who’s bearish on silver and doesn’t believe the white metal should trade above $30.
Karnani said silver’s rise is all about “retail fury,” — and everyone in India and across the globe now wants to invest in silver.
In India, there is shortage of physical silver due to huge retail demand, premiums in physical silver are very high and, Karnani said, he’s never seen such a huge retail interest in silver. “Once the global retail fury settles down and/or reduces, silver prices will fall to $34.76 and below.”
Lagging shares
Mining shares offer another red flag pointing toward a potential end to silver’s rally, at least near term.
“Silver mining stocks exploded in March and about two weeks ago, stopped going up along with the metal,” TheSilverShortage.com’s Thomas said on Monday. “There will come a time when they are attractive again but at much lower valuations.”
Year to date, U.S. shares of Coeur d’Alene Mines Corp. /quotes/comstock/13*!cde/quotes/nls/cde CDE +0.03% , the largest U.S.-based primary silver producer, have fallen 4.6%, while Canada-based Silver Wheaton Corp.’s /quotes/comstock/13*!slw/quotes/nls/slw SLW -1.10% U.S. stock has climbed 5.2%.
“Silver stocks are flashing a warning sign,” said Sam Subramanian, editor of AlphaProfit Mutual Fund and ETF Newsletters. “Owners of silver stocks are becoming cautious as the risk-reward ratio for owning silver turns unfavorable.”
And with cash costs for producing silver at a new mine estimated at $10-$15 an ounce, according to Ned Schmidt, editor of the Value View Gold Report, “silver is going to come flying out of the ground at current prices.”
Silver is the ‘internet stocks’ of 2011,” he said, emphasizing that the metal is really worth about $16 an ounce.
The CME Group Inc. /quotes/comstock/15*!cme/quotes/nls/cme CME -2.72% has raised the initial deposit required for speculators to purchase a 5,000-ounce silver futures contract several times over the past few months, most recently on Tuesday.
The rise in margin requirements is “the guillotine blade being raised to the top of the structure,” said Schmidt. “The guillotine is about to slam down on those with their heads stuck out in the silver market.”
Cautious approach
Needless to say, silver’s big run has a lot of investors wondering what to do next. As analysts offer advice, the only common factor is caution.
Paul Mladjenovic, author of “Precious Metals Investing for Dummies,” said he still views $100 silver as a “when,” not an “if,” and warns that “silver’s next major correction will fool the pundits into thinking ‘the bubble has popped’.”
It’s still cheaper to acquire coins at $50 for silver than at $1,510 for gold, said Gijsbert Groenewegen, a managing partner at Silver Arrow Capital Management. “Investors might become a little bit cautious but long term there is no issue.”
Doug Lockwood, chief investment officer at Hefty Wealth Partners in Auburn, Ind., said the reward of alternative assets such as silver has been great over a long stretch, but “there is too much risk for very little reward at this juncture/short run and it’s best to take some money off the top” until the market gets a better view over the next couple of weeks on the Federal Reserve’s approach to unwinding the second round of quantitative easing.
So what’s the safest route? Place trades on dips in the silver price rather than chase its extraordinary rally, said Sam Kirtley, chief executive officer of SK Options Trading.
“We are not in a mania bubble phase yet, [but] there is a strong chance we will enter bubble territory soon at this rate, and that is why we are cautious,” he said
“We have now entered just the beginning of the third [and final] phase of the bull market in precious metals” — the phase in which everyone has become aware of the bull market but aren’t yet engaged and involved in it, he said. The third phase is far from over but when it ends, “precious metals will become a bubble with heavy public participation.”
Silver futures /quotes/comstock/21e!f1:si\n11 SIN11 +2.25% spiked 3.4% on Thursday alone to close at over $47.50 an ounce. Prices traded at under $31 an ounce at the end of last year and 10 years ago, the white metal sold for less than $4.50 an ounce. Read about silver’s upbeat prospects two months ago.
Now even The Grandich Letter Editor Peter Grandich, a self-proclaimed former “raging bull” on silver from under the $10 level, is saying “sell all silver holdings.”
“It’s not that it can’t go higher but I can’t first start buying it here, and I learned it’s best to consider selling when you can’t buy anymore,” he said. So, “if you like crowds, feel free to stay on board. For me, around $50 is a lovely destination to get off for a trip now eight years in the making.”
Risky business
In fact, quite a few analysts who have watched the silver market for years are throwing caution to the wind.
Chintan Karnani, chief analyst at Insignia Consultants in New Delhi, said he was bullish at the start of the year, in part, because of silver’s relative underperformance versus gold over the past three years.
Long term, he still expects silver prices to find support as currency markets breakdown, sovereign debt risk rises in the euro zone and other nations and calls for democracy in the Middle East and North Africa grow, with silver seen as a “cheaper alternative to gold for investment.”
Karnani never expected, however, that silver would be near $50 by the end of April.
“I am not bearish on silver. I am only concerned over the pace of the rise of silver,” he said. “For long-term sustainability, silver prices must fall for a week and then rise. If silver prices continue to rise, then a bubble will be formed and silver prices can crash to $25 next year.”
Just how impressive silver’s climb is compared to gold’s. Year to date, silver futures are up 54% while gold futures have gained under 8%.
“Silver has rallied, moving exponentially, while gold is still moving linear,” said Jeb Handwerger, editor of GoldStockTrades.com, in recent newsletters. “I am very concerned that silver may be overheating as the herd tries to force their way into this trade.”
A few analysts go even further and say silver’s not worth $50.
At this “important pivot point” in silver, the question is “sell now, or sell later?” said Jon Nadler, a senior analyst at Kitco Metals Inc.