Why Silver Prices Are Falling So Quickly

Loyal readers of this column are aware of the fact I usually write about gold, rarely about silver. Yes, they are both precious metals, but that have two very different roles in society and the economy.

I’ve always looked at gold as a safe haven against inflation and eroding fiat paper, especially the U.S. dollar. Silver is a metal used in industry, everything from photographic film to jewelry. My point has always been (and it may be severe) that, if the U.S. dollar in no longer the world’s reserve currency, what will replace it? I can’t see central banks buying silver as their reserve currency. We know central banks have always bought or sold gold as they have adjusted their reserves.

Some of the stock advisories we publish have made excellent picks in the silver mining sector—we have some silver stocks that quickly doubled in price. But the boom in silver prices was bringing in too many speculators. The COMEX, where silver futures trade, quickly put that to an end, which I compliment them for.

One year ago, an investor or speculator would only need to put up $4,250 of margin to control a single futures contract of 5,000 of silver. Effective this morning, it will now take $16,200 to control that same contract. The COMEX has increased the amount of money which investors and speculators must put up to control one silver futures contract by 281% in less than a year (actually, most of that increase came in the past couple of months).

Hence, the “weak hands” (as I call them) are selling out their contracts. In the first three trading days of this week, we witnessed the biggest drop in silver prices since 1983. Silver is down 19% in price since the end of April.

I celebrate what the COMEX is doing by increasing the margin requirements for silver futures traders. Long-term this will be a positive for the silver market. We can only wish the banks and government showed the same restraint in 2005 instead of allowing speculators into the U.S. housing market with no real limit on their speculation.

Is the bull market in silver over? I don’t believe so. Given the continued economic expansion (or should I say explosion) in China, demand for silver is increasing yearly. Those who control the futures market for silver are simply tightening the rules, forcing speculators out—a move that we will be a huge benefit for silver prices in the long term.

Michael’s Personal Notes:

Two international notes this morning…

Spain, which has introduced several unexpected deficit-cutting measures, saw demand at its government five-year bond auction fall yesterday. The yield on these bonds jumped to 4.6%.

Portugal reported earlier today that it expects its GDP to contract two percent in 2011 and another two percent next year. The country will be announcing further austerity measures.

Other countries like Greece and Italy are on very shaky economic ground. Germany is the only economy in Europe undergoing any real type of recovery.

My point with all this? Europe is economically fragile and could lapse back into recession. This will place added pressure on an already weak euro.

The U.S. dollar…the euro…which is the worst of both evils and which currency will the oil producers eventually demand for their oil? Stay tuned.

Where the Market Stands; Where it’s Headed:

The chart of the Dow Jones Industrial Average has been similar to a straight line up since March of 2009. I’m not going to fight that trend or the Fed’s desire to create a sea of liquidity for the economy.

Yes, upside is limited. But I continue to believe that we are still in a bear market rally.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.