Beware dead cat bounce in silver prices

I’m inclined to think silver prices could fall further before they sprint higher toward the end of the year. Here are three reasons why you shouldn’t be so quick to jump back into the market.

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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Gold price flirts with all-time record highs

With the dollar tumbling to a 15-month low, gold spot prices have risen more than $30 over the past five trading days. That’s pushed the yellow metal less than $10 shy of its all-time record high of $1,444.40 an ounce.

With the dollar tumbling to a 15-month low, gold spot prices have risen more than $30 over the past five trading days. That’s pushed the yellow metal toward its all-time record high of $1,444.40 an ounce – a record that was set on March 7.

Investors have shown a preference for precious metals as a safe haven in the face of turmoil in the MENA region and the devastation in Japan. Traditionally, the dollar has served as a refuge of last resort, but analysts argue that the Fed’s quantitative easing program has encouraged investors to look elsewhere.

“The dollar is not currently a safe haven in times of macroeconomic uncertainty because any downward revision in global and U.S. growth automatically means a higher risk of QE3,” Beat Siegenthaler, senior currency strategist at UBS, wrote in a note to clients (per MarketWatch).

The Fed’s policies are making it more difficult to maintain investor confidence in the dollar, but an unexpected rise in interest rates or a premature halt to QE2 would likely spook the markets as the U.S. recovery looks promising but is far from a sure bet. The end result is a move into gold, silver and other precious metals as investors look for ways to protect their assets.

Gold spot prices spiked as high as $1,435 an ounce in early trading yesterday; less $10 shy of all-time record high prices. It’s a trend that will likely continue so long as the threat of QE3 hovers over currency markets.

Yesterday’s top-performing gold mining stocks (mostly microcaps) all rose more than 10 percent with Vista Gold Corp. (AMEX:VGZ) sprinting up 19.1 percent. Here’s a look yesterday’s other winning precious metals stocks:

  •  Mines Management, Inc. (AMEX:MGN) +18.2%

  •  Alexco Resource Corp. (AMEX:AXU) +12.3%

  •  Kobex Minerals Inc. (AMEX:KXM) +11.3%

  •  Kimber Resources, Inc. (AMEX:KBX) +10.3%

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