Silver’s up nearly 10 percent in three day of trading. The powerful rally comes on the heels of last week’s brutal 30 percent peak-to-trough sell-off. Have we put in a bottom or are we in the midst of a dead cat bounce?

I’m inclined to think silver prices could fall further before they sprint higher toward the end of the year. Here’s why:

1) Locking in prices. It’s better to sell any commodity during a rally than it is during a sell-off. The current recovery in silver prices will likely have silver producers jumping on longer-term contracts to lock in silver prices that are at least somewhere close to where they were two weeks ago. That could exert more downward pressure on metals prices.

“In the medium term, we anticipate prices settling lower, in the $28 to $30 an ounce range as companies producing silver as a by-product of gold or base-metal mining add to downward pressure by selling silver forward to lock in current high-price levels,” said Tom Winmill, manager of Midas Fund (MIDSX), told Investor’s Business Daily.

2) Selling begets selling. At least 10 other times in recent history, silver’s had 15+ percent declines in a week, according to Bespoke Investment Group. Of those 10 times, prices bounced the following week, then continued declining for several months. History shows up that massive sell-offs to lead to continued selling for an extended period (a phenomenon that’s often referred to as a consolidation period).

3) A recovery in the dollar. As Jim Puplava loves to say on The Financial Sense Newshour (one of the best finance podcasts on the web, by the way), the dollar looks a bit like the best house in a bad neighborhood. The ongoing crises in the Eurozone, and a disinclination to raise rates across the pond, indicates that the Euro may be in for a more brutal sell-off than our beloved greenback. With investors moving out of precious metals and out of the Euro, a short-term correction for the dollar might be long overdue. Some investors, including WallStreetDaily, are calling for as much as an 8 percent rise in the Dollar Index (DXY) in the coming months.

Summary: The long-term bullish picture for gold and silver remains intact. In the short-term, bears seem to have the upper hand. The powerful rally in silver prices since the start of the year indicates investors were over-leveraged on the metal, and it’s going to take longer than a week to shake those “weak hands” out of the market. If you’re looking to add more silver to your holdings, I’d recommend waiting. You just might be able to get it for less than $30 an ounce before silver starts climbing again … and rest assured it will start climbing again. It just might not happen as soon as most silver investors would like.

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Tags: dollar, DXY, MIDSX, silver mining stocks, silver price, silver price forecast

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