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When will we see silver prices at $50 oz. again? Sooner than you might think…

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With gold hovering just 5 percent off its all-time record high, silver’s been quietly trading in the shadows some 20 percent away from its all-time record high. The white metal appears to be gaining momentum, though, after a precipitous price collapse in May.

This spring’s silver price collapse followed a surge in silver prices to a brand new nominal record high around $50 an ounce. As soon as the white metal took out that milestone, the selling started and it didn’t stop until silver prices had shed more than $18 an ounce. That was good for a 36 percent plunge in eight days!

Since then, the metal’s been in consolidation mode, and most investors have focused on silver’s yellow cousin gold. Gold’s spent the past two-and-a-half months on an absolute tear rising from $1,500 an ounce on June 27 to just shy of $1,900 an ounce in recent trading. That’s a gain of more than 26 percent.

The CME has taken note of the volatility in gold prices and raised margin requirements for gold futures trading on the Comex. If you’ll recall, the CME starting doing the same thing when silver prices collapsed this spring.

There’s lots for investors to be nervous about, and that’s pushed them into precious metals. One of the more interesting facets of investing in gold and silver, though, is watching how investor sentiment shifts from one metal to the other then back again.

Right before silver prices collapsed earlier this year, I wrote a post suggesting it was time for investors to switch from silver to gold. Now, it’s looking like it might be time to do the opposite.

As of this writing, the silver:gold ratio stands at 44:1. This spring it fell as low at 30:1, and Eric Sprott was calling for a ratio as low as 10:1. The historical average rests somewhere around 65:1, but I don’t think we’re going to get that high for several reasons:

1) The silver price collapse was partly based on psychology. When silver broker its all-time record nominal high, everyone and their cousin felt like it was time to take profits off the table. Once the big fish started doing that, smaller traders panicked and the bottom fell out on prices. The good news is this: that $50 an ounce psychological barrier has been wiped out. Where we go from here is anyone’s guess.

2) 25+ percent in a month. When silver prices bubbled up in April, the cost of the metal rose 30 percent in just over a month. In recent trading gold shot up more than 25 percent in roughly the same time span. A gain of 25 percent in a month is too good to be true for institutional investors. They’ve got to lock in those gains, even it means taking some profits off the table.

3) Frothy futures. The easiest and most obvious sign that a market’s getting frothy is when an exchange raises margin requirements on trading for a particular commodity. As I noted above, we saw that happen to silver in the spring, and we’re seeing it happen to gold right now. The CME Group has a vested interest in protecting itself from losses. When it raises margin requirements, it does so because it sees the writing on the wall: the market’s getting too frothy to safely lend cash to metals speculators.

For me, gold’s looking frothy right now, and silver appears poised to go higher; perhaps even pushing through that $50 an ounce barrier again.



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