Time to short silver?

A number of noted hedge funds and hedge fund managers have started selling. Does that mean it’s finally time to start shorting silver?

If there’s one rule I’ve learned in investing, it’s that ignoring the old saying “the trend is your friend” can lose you a whole lot of money. Stocks, bonds, currencies and commodities are all cyclical. And while I believe that the long-term trend in silver is up (reference my post yesterday: 3 reasons the rally in gold and silver prices is far from over), it’s clear that support for the white metal is breaking down in the short-term.

In part, we have the CME Group to thank for that. The Comex’s owner announced that it was raising margin requirements for the metal for the third time time in a week. As of the close of business on Monday, new initial margin requirements for silver have climbed from $14,513 to $16,200 per contract, according to BusinessWeek. Margins have risen more than 280 percent from $4,250 over the past 12 months.

The CME Group adjusts margin rates when it fears volatility in the markets could expose the company itself to losses. If metal falls too fast, for example, some traders may be unable to cover their losses – and that’s tantamount to a default that cuts into CME’s profits.

“Silver is often the lead indicator for changes in trends, or at least for corrections,” an analyst at Societe Generale SA wrote in a note to clients (per BusinessWeek). Right now, the lead indicator is pointing down.

And physical silver ETFs probably aren’t helping the situation. Stocks like iShares Silver Trust (NYSE:SLV) and the Sprott Physical Silver Trust (NYSE:PSLV) trade on exchanges just like shares in companies. They take the equity they get from investors, though, and use it to purchase physical bullion. When investors move out of the ETFs, SLV and PSLV sell bullion from their physical stockpiles.

Since ETFs are so easy to move in and out of, many investors fear they’re injected even more volatility into the already-volatile silver market. That steepens both climbs and sell-offs in the metal.

The most damming signal yet that the end may be near for silver, though, comes from a number of noted hedge funds and hedge fund managers that have started moving out of the metal. Among them? George Soros, Passport Capital’s John Burbank, Alan Fournier of Pennant Capital and Eric Sprott of Sprott Asset Management (the company that happens to manage the Sprott Physical Silver Trust).

Inflation may be imminent, but your best bet on making money might be shorting one of the world’s most popular inflationary hedges. We can logically justify why an asset should move in a particular direction, but all we know in the end is the trend. And you shouldn’t have much trouble identifying the trend if you look at silver’s recent charts.

Not sure how shorting works? Check out my post: How to short silver.

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