Can silver prices bounce back in October after 27 percent decline?

Don’t let this sell-off scare you. When the dust settles, I think silver’s going to resume its upward climb. Here’s why.

Silver prices crumpled last week falling 27 percent off the previous week. The white metal’s currently trading at $30.70 – a level we haven’t seen in seven months. It’s got me wishing I had some extra cash laying around to dump into silver.

As I wrote last week (see my post Seasonal silver charts say now’s the time to buy), we’re entering what’s traditionally been the strongest time of the year for silver prices.

But bad news from numerous sectors have converged on the white metal giving it nowhere to go but down. Perhaps the biggest blow to the precious metals market came after trading on Friday when the CME Group announced yet another hike in silver margin requirements (per the Wall Street Journal).

At the close of trading on Monday (Sept. 26, 2011), silver investors will be required to have 16 percent more equity in their accounts to buy a silver futures contract. That ups the cost for a 5,000-ounce contract to $24,870. Traders who hold a silver contract overnight will have to keep $18,500 in their accounts.

The announcement will likely put even more short-term price pressure on silver, so don’t look for prices to stabilize until later in the week. It’s important to note that the CME Group didn’t target silver futures contracts alone in their latest margin requirements hike. They also rose requirements for copper (by 18 percent) and gold (by 21 percent).

The move makes sense as the rapid collapse in metals prices leaves the CME Group exposed to potential losses if traders were over-leveraged and suddenly find themselves unable to cover the cost of a contract.

Investors around the world have been selling assets to raise cash as uncertainty in Europe and signs of slowing growth in China have many convinced we’re staring at the start of another global recession. If that’s the case, look for the Federal Reserve to announce new forms of monetary easing – an act that will further debase the dollar and drive up the price of gold of silver. If that happens, it’ll likely happen quickly.

If things the pieces slide into place, silver prices in October could pop powerfully to the upside. There’s been rampant speculation that the decline in metals prices over the past few weeks has been largely due to selling by hedge funds eager to lock in gains before the end of the quarter.

Recent reports from Merrill Lynch confirm that hedge funds and managed futures funds have been selling all forms of precious metals including gold, silver, copper, platinum and palladium (per Barron’s).

After those funds lock in profits, silver just might look like the best option for the upcoming quarter, which kicks off in October. Merrill Lynch agrees with analysts in the report maintaining silver looks the most attractive in the short-term. Silver recently broke out of a long consolidation period, and last week’s wholesale sell-off just makes silver look that much more attractive on price and fundamentals. Don’t let last week’s sell-off scare you. When the dust settles, I think silver’s going to resume its upward climb.

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2 thoughts on “Can silver prices bounce back in October after 27 percent decline?”

  1. One Question?
    Are the margin requirements the same on both long and short Silver/Gold/Copper, etc. contracts?
    I ask because it seems that the recent Margin Requirement increase’s has heretofore ONLY driven the Bullion Spot Price down……appears to benefit JP Morgan and others who hold huge paper short positions. Is the CME in concert with others trying to stop the exposure of the probable 100 to 1 paper to bullion leverage?

    1. The margins are the same for long and short contracts. Interestingly, the CME Group does lower margin requirements during periods of decreased volatility. I’ve read a fair amount about the accusations against JP Morgan (check out our post: http://tradingstocks.me/silver-price-manipulation-case-narrows-in-on-jpmorgan-drops-hsbc-for-now/), though, and I still have trouble wrapping my mind around why they thought taking such enormous short positions was/is a good idea. That said I do believe the CME Group is simply acting in its own best interest when it raises margin requirements on metals. They do it for copper, gold, cotton — anything that’s getting frothy because when markets overheat, they stand to lose money if a commodity plunges and traders can’t meet their obligations.

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