Tags: michael | carr | silver | price | bubble

The Next Bounce in Silver May Really be an Exit Sign

By    |   Wednesday, 25 May 2011 08:25 AM

After peaking near $50 an ounce, silver suffered a sharp 30 percent drop over the next two weeks. Prices have stopped falling, at least for now, and many wonder what’s next for silver.

Silver very likely experienced a bubble, and that’s what drove its price toward all-time highs.

Bubbles aren’t based on fundamentals. By definition, the price of something in a bubble moves higher just because it’s moving higher.

Bubbles end with prices falling sharply. Since the move up was disconnected from economic realities, the move down usually goes too far as well, as investors seem to get angry at themselves for having bought into the hype and just keep selling.

Some speculated that silver was driven lower by regulators who increased margin requirements near the top. Margin is actually a performance bond, required by the exchanges to make sure traders pay for what they bought. In the case of silver, margin is usually set at 4.5 percent of the cost of the value of the silver in the contract.

Regulators simply responded to the price move, and large traders knew the margin boost was coming. This means the fall in silver prices wasn’t the result of a conspiracy, but instead reflects changes in what investors are thinking.

If there wasn’t a fundamental change in supply and demand for silver, and there wasn’t a conspiracy to drive the price higher or lower, the only clue we have as to what we should expect next comes from the history of other bubbles.

In the past decade or so, we’ve seen bubbles in Internet stocks and U.S. housing. Both experienced sharp declines, followed by brief periods of stability and even a bounce higher before falling even lower.

In the case of Nasdaq stocks, the bounce took prices very close to their old highs.

This time is probably not any different than the past. Traders can look for a bounce higher in silver, but then the downtrend is likely to continue. Long-term investors should use that bounce to get out, even if it means taking a small loss.

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MichaelCarr
After peaking near $50 an ounce, silver suffered a sharp 30 percent drop over the next two weeks. Prices have stopped falling, at least for now, and many wonder what s next for silver. Silver very likely experienced a bubble, and that s what drove its price toward...
michael,carr,silver,price,bubble
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2011-25-25
Wednesday, 25 May 2011 08:25 AM
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