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Analysts Warn of Silver Sector Overheating

By: Roman Baudzus

Nothing is stopping the current silver price rally. Last Friday the white metal reached yet another 31-year high at more than $40 per ounce. The silver price has doubled since September 2010. Silver was – along with palladium – one of the commodity sector´s best performing assets last year. But more and more analysts are warning of the silver price overheating, which could result in an extensive correction phase.

Nevertheless, the underlying factors that are boosting the price are still present. Silver positions held through the iShares Silver Trust (SLV) climbed to almost 360 million ounces last week. SLV is the world’s largest silver ETF. An ETF corresponds with a participation model, through which global investors take a share in the fund, which is publicly traded at a stock exchange.

Because of silver’s virtually unstoppable rally, an increasing number of analysts and market observers are warning that silver is overdue a correction. In their view, investors should not blindly enter the market, but rather wait for an extensive correction phase before buying. The technical situation should also lead to caution on the part of investors. The silver price has moved relatively far from its important long term moving averages; the 50-day moving average is currently $34.07, while silver´s 200-day moving average is $26.02. Silver is currently trading above $41.00, and looks overextended in comparison to these moving averages. The ETF Review Newsletter commented last week that a significant technical setback was likely.

Regardless of the technical situation on the price charts, the demand situation is still bullish. Small speculators and retail investors across the world are still buying, with plenty of room for more demand from this sector. Silver coins such as the American Silver Eagle, as well as jewellery and silver plates are in high demand, as private investors hoard the metal owing to fears of a further devaluating of the US dollar and accelerating inflation.

US precious metals traders recently disclosed that their stocks of physical silver – especially in the form of coins and bars – were being depleted very rapidly. They have been ordering more metal as a result of this demand, and bar and coin prices have been adjusted dramatically higher within only a relatively short period of time. Delivery times have also had to be extended in the last couple of months.

Roman Baudzus
www.goldmoney.com

Posted Monday, April 11 2011