Silver pullback is a buying opportunity

The Chicago Mercantile Exchange raised margin requirements on silver futures four times in two weeks. While margin requirements must go up when prices go up, four times in two weeks sure is grist for those who say the big banks are short silver and will do anything to derail silvers bull run.

Disappointment over silvers failure to breach the psychologically important $50 level last week is also a factor. The hot money is moving on to other things for now. This leads to a correction, a normal and necessary part of any bull market.

And then theres simple profit taking many people bought silver at much lower levels and so theyre locking in gains. Certainly big funds run by George Soros and others are doing just that. And you know what, I told my subscribers to do that, too, because theres nothing wrong with taking profits. Silver, gold hit by report of Soros selling.

Bullish forces

Those short-term bearish forces, though, overlay these longer-term, bullish forces:

Industrial demand for silver is enormous. Nearly 75% of the worlds silver supply is used to make everything from chemical reagents to jewelry to solar panels to plasma TVs. And with the global economy expected to grow by 4.5% this year, according to the International Monetary Funds latest figures, that industrial demand for silver is only going to increase.

The decline in the U.S. dollar is threatening to turn into a collapse. The buck recently touched its lowest level against the euro since December 2009, and the U.S. Dollar Index DXY -0.35% was recently off 7.5% just in 2011. For a currency, thats a huge move! Since silver as well as gold and other commodities are priced in dollars, they generally move opposite to the greenback. Its what I call the seesaw of pain somebodys always getting hurt.

Mine supply of silver is tight. While silver fabrication demand grew by 12.8% last year, silver mine production rose by only 2.5%, and mine supply accounts for 70% of all silver supply, according to GFMS. Its hard for miners to crank up silver production because two-third of silver produced by mines is as a byproduct to other metals. Mine supply IS expected to rise this year, but it will be hard-pressed to keep up with the expected rise in demand.

The fundamental fact is that, despite the recent correction, both gold and silver are in big bull markets. Until that changes, pullbacks and corrections are buying opportunities.

China syndrome

The big bullish story in silver is just one aspect of the demand shift were seeing to China and other emerging markets. China used to be a major seller of silver supply into the global market; now its an importer. And its importing more and more commodities of all types. China has a huge and growing middle class who want all the things that big, fat Americans want more food, cars, clothes and jewelry, TVs and other electronics.

Click to Play
Alternatives to gold and silver
As gold and silver tank, assets besides commodities can hedge against inflation, according to David Goerz of HighMark Capital Management, who recommends high-quality dividend-paying stocks as well as small caps.

And its not just China. According to Goldman Sachs, 70 million people worldwide are joining the worlds middle class each year. In 20 years the middle class will add another 2 billion people, most of them from emerging markets. Many of these nations have a cultural affinity for gold and silver.

So yes, we are seeing some air whoosh out of silvers bubble. But I dont think weve seen the real mania in silver yet. That doesnt mean the metal cant go lower. If the U.S. dollar rallies, that will likely trigger another leg down in silver. If the global economy slumps and theres the potential for that due to stubbornly high oil prices that could knock silver lower as well.

If you want to short silver in the face of strong demand like the 1.3 billion Chinese who seem ready to buy silver on the dips, or the billion people in India ready to do the same thing good luck to you. I think youll need it.

As for me, Im waiting for this silver correction to run its course, then Ill buy again. A 50% retracement of golds recent bull run looks like a likely target, and a good place to re-enter the iShares Silver Trust SLV +2.25% , Silver Wheaton SLW +1.91% and other silver bellwethers.

Good luck and good trades.

Thanks sumeet

Gold and silver futures gained in electronic trading Wednesday, as a softer U.S. dollar supported investor demand for precious metals.

Gold for June delivery /quotes/comstock/21e!f:gc\m11 GCM11 +0.50% gained $6.10 or 0.4%, to $1,523.00 an ounce on the Comex division of the New York Mercantile Exchange during Asian trading hours.

Silver extended its rebound on Wednesday, with the July contract /quotes/comstock/21e!f1:si\n11 SIN11 +1.97% adding 65 cents, or 1.7%, to $39.14 an ounce.

The U.S. dollar /quotes/comstock/11j!i:dxy0 DXY -0.13% , which measures the greenback against a basket of six rival currencies, slipped to 74.612 from 74.700 in North American trade late Tuesday.
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In the midst of a once in a century mining boom, Australia announces its new federal budget. But some policy makers are growing concerned that the country isn't keeping up with the infrastructure needed to sustain the growth.

Weakness in the U.S. dollar supports the buying of dollar-priced commodities.

The metals moves also came as China reported a slight easing in inflation for April but also posted slower industrial-output growth. Read more about Chinese inflation.

The broader complex of metals also strengthened on Wednesday.

Copper for July delivery /quotes/comstock/21e!f:hg\n11 HGN11 -1.32% gained 1 cent, or 0.2%, to $4.05 a pound.

Sister metals platinum and palladium improved, with July platinum /quotes/comstock/21n!f2l\n11 PLN11 +0.09% rose $7.10, or 0.4%, to $1,808.00 an ounce, while palladium for June delivery /quotes/comstock/21n!f1a\m11 PAM11 -0.60% advanced $2.70, or 0.4%, to $735.35 an ounce.

Spot silver rebounded as much
as 2.3 percent and gold edged up on Thursday after losses in the
previous session, supported by light buying in Asia, while a
firm dollar weighed on market sentiment.
The commodities market took a hit on Wednesday from weak
Chinese industrial output data, improving global grain supplies
and rising U.S. gasoline stocks.
Light buying was spotted in the physical gold and silver
markets, but activities slowed down from Wednesday after market
participants were caught off guard by the sell-off, led by a
drop of 9 percent in silver.
"People are still worried about commodities -- we have seen
some short-covering, some buying on dips today, but the buying
is not substantial," said Dick Poon, manager of precious metals
at Heraeus in Hong Kong.
China's April industrial output was significantly weaker
than forecast, suggesting the world's second-largest economy was
cooling, reducing the need for further aggressive monetary
policy tightening even as inflation remains high.[ID:nL3E7GB0H2]
"If inflation had been much higher, it would have meant more
buying in gold and silver," said a Tokyo-based trader. "Since
the economy is slowing and inflation seems under control, it is
relatively bearish for precious metals."
Spot silver rose as much as 2.3 percent to $35.88 an
ounce, and eased to $35.43 by 0340 GMT. U.S. silver futures
SIcv1 edged down 0.2 percent to $35.46.
Bearish technicals contributed to the sharp fall in silver,
the trader added.
"It was a perfect textbook scenario -- when silver failed to
break above $39.4, the 61.8 percent Fibonacci retracement level
from the high last week, it collapsed," he said.
The gold-silver ratio, used to measure how many ounces of
silver is needed to buy an ounce of gold, jumped nearly 9
percent on Wednesday to its highest level since late February,
at 42.78.
Silver is likely to consolidate around the $35 level, after
a rapid rally pushed it to record high near $50 last week and a
dramatic sell-off knocked prices down more than 25 percent last
week.
Silver remained the best performer of the precious metals
complex, up 15 percent so far this year, compared to gold's 6
percent gain.



Spot gold edged up 0.4 percent to $1,505.19, also
rebounding from the losses in the previous session. U.S. gold
futures gained 0.3 to $1,505.10.
The $1,490 level was seen to offer strong support to gold,
traders said.
"We may see gold prices retrace a bit, as the factors that
had supported gold's recent rally are fading," said Hou
Xinqiang, an analyst at Jinrui Futures in China.
These factors include the unrest in the Middle East and
North Africa, high oil prices and dollar weakness, he said.
The dollar index , a measure of the greenback's
strength against a basket of currencies, held steady after
hitting a three-week high on Wednesday, as fears over Greece's
debt crisis weighed on the euro.

Gold and silver have lost some luster with investors; the price of oil and other natural resources is lower, and speculation in many agriculture sectors has dried up. So why are three veteran money managers who can put money anywhere still holding on to commodities?

Because they believe that emerging markets will live up to their promise. Theyre convinced that the growth of the worlds nascent economies will create a bold new consumer class, whose desire for more and better will feed demand for raw materials, industrial and precious metals, and perhaps most critically food and water.

GLOBAL INVESTING IN A POST-CRISIS WORLD
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How to react to global crises be prepared: For investors, there's no way to escape global crises,
but there are ways to protect your portfolio. Veteran money managers at a MarketWatch Investing Insights event share their strategies.

DAVID CALLAWAY
Watch trends, not headlines
The dark days of the global financial crisis, with its fears of economic collapse, are now in the rear-view mirror. Its going to take more than political turmoil and some natural disasters to rattle investors intent on getting their money back.

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The world is growing and using more commodities, said Marshall Berol, co-manager with Malcolm Gissen of Encompass Fund ENCPX -1.91% , which has been heavily invested in various resource stocks for several years.

China, the Far East, the Middle East, India, Latin America, South America, Brazil, Argentina, Chile these economies are growing, Berol noted. There are setbacks from time to time, but theyre growing, and as they grow, more people are employed, at better jobs; they have money and they want what were accustomed to in this country houses and cars and cell phones and refrigerators.

Berol is also a confirmed gold bug. Its going higher, he predicted for gold. Its not at a top yet.

Values and trades

Berol addressed his comments to MarketWatchs Investing Insights live event held in San Francisco last month. The theme of the event was Global Investing in a Post-Crisis World. In addition to Berol, attendees heard views about precious metals and commodities from Michael Cuggino, manager of Permanent Portfolio PRPFX -1.17% , a mutual fund focused on capital preservation, and Cody Willard, principal of CL Willard Capital, who writes the Revolution Investing newsletter and an online blog called The Cody Word for MarketWatch.

Willard, the panels lone trader, differed with Berol and Cuggino on the bullish prospects for gold, silver and precious metals, but he shared their optimism about commodities.

Theres a good trade a good opportunity where you can short gold and silver, and buy against that a basket of oil, cotton, corn, soybeans, anything you actually have to consume, Willard said. Because its the poor people who are driving commodities, and I dont think theyre going to buy gold when theyve having to figure out how to feed the kids.

The event was held several weeks before both precious metals and commodities suffered a sharp blow. The wave of selling in early May could have been the result of speculators exiting with their profits after a mammoth rally. Or, more ominously, the downturn could reflect traders fundamental concerns that global economic health is weakening, which would curb demand for materials brought out of the ground, scarce or not.

Weathering storms

Yet big swings are to be expected with these investments. The panelists were well aware in April that prices for precious metals and commodities might have come too far, too fast. Indeed, over the following weeks investors in these alternative assets grappled with indications that U.S. economic growth is weaker than expected, and that soaring food and gasoline prices would quash demand fears that ultimately did torpedo some of the momentum, especially for silver.

Berol and Cuggino acknowledged the potential for a correction in these markets at the April meeting, but noted that day-to-day or even quarter-to-quarter gyrations dont concern them much. Instead, a long-term focus steers their portfolios through a sectors booms and busts.

Were not looking to get in and out, Berol said. Were looking for what is going to be worth more down the road.

I dont get wrapped up in quarters, Cuggino added. You dont have to worry about what the stock market is going to do every day, whats the Feds going to do, whats going to happen in the world.

Cugginos mutual fund is unusual in that its constructed with an eye toward downside protection. Most of its assets are spread across gold, silver, natural resources stocks, Swiss francs and U.S. Treasurys.

The way we go about the basic flaw in human nature of not being able to predict the future is by putting together a broad array of different asset classes in one portfolio that work at cross purposes, Cuggino said.

The funds holdings individually might be highly risky, but together they work as a team to cover the bases and reduce overall portfolio volatility.

Gold, in particular, is Cugginos insurance policy against what he views as the ill-effects of the Federal Reserves policy of low interest rates and easy money a stance, he said, that is stoking inflation, debasing the value of the U.S. dollar and putting a high floor under gold.

GLD 146.61, +0.07, +0.05%

SLV 34.70, +0.31, +0.90%

75%50%25%0%-25%
11FMAM
Where [the price of gold and commodities] goes from here, I think, given that scenario where interest rates continue to be very low to negative after inflation, potentially thats traditionally a very bullish sign, Cuggino said.

You have demand picking up not only with emerging markets and more disposable income, but you have demand picking up on the investment side whether thats mutual funds, hedge funds, institutional investors, sovereign wealth funds or governments potentially, he said.

Last time I checked, Cuggino added, there wasnt a huge increase in supply coming out of the ground. And with less confidence in paper money around the world, gold will take on a lot more importance as a store of value.

MARKET NEWS
* Asian share markets fell on Thursday after a second big
sell-off in commodities in less than a week cut investor
appetite for riskier investments and boosted the U.S. dollar,
although oil prices clawed back some losses in early trade.
[MKTS/GLOB]
* The dollar dipped but held near a three-week high against
a basket of currencies on Thursday as a rout in commodities and
an uncertain outcome on Greece's debt problems lowered risk
appetite and prompted traders to expect more unwinding of
dollar-funded bets on risk assets. [USD/]
* Brent crude turned negative on Thursday after earlier
rising more than 1 percent as investors focused on strong demand
growth in Asia, following a sell-off the previous day triggered
by a surprise increase in U.S. gasoline stockpiles. [O/R]
* European stock index futures pointed to a lower open for
shares on Thursday, with heavyweight mining stocks poised to
follow metal prices lower as investors dump risky assets. [.EU]
* U.S. stocks nearly erased a three-day rally on Wednesday
as energy and other commodity shares sank, feeding worries about
the market's ability to stay on its upward path. [.N]

FUNDAMENTALS
* Eastern Platinum Ltd (ELR.TO) posted a quarterly loss on
lower output and the Canadian company said its flagship
Crocodile River Mine project in South Africa was damaged
following a wage dispute with the National Union of Mineworkers
(NUM). [ID:nL3E7GC08E]
* Mexico's central bank sees value in holding gold as part
of its reserves, Bank of Mexico governor Agustin Carstens said
on Wednesday. The central bank bought more than $4 billion worth
of bullion in the first quarter of this year. [ID:nWNA8289]
* The five largest mutual funds investing in
commodities-related equities shed an average 3.5 percent of
their net asset value after Thursday's rout in oil, minerals and
precious metal prices, data from Lipper shows. [ID:nLDE7490FT]
* Canadian mid-tier gold miner Iamgold Corp's (IMG.TO)
first-quarter earnings almost tripled as it started production
at its West African Essakane mine in Burkina Faso.
[ID:nL3E7GB49C]
* Holdings of the largest silver-backed ETF, New York's
iShares Silver Trust (SLV) fell 0.43 percent on Wednesday from
Tuesday, while the largest gold-backed exchange-traded-fund
(ETF), New York's SPDR Gold Trust (GLD) holdings dropped 0.08
percent for the same period. [GOL/ETF]

TECHNICALS
* Gold support at $1,490.00 an ounce, resistance at
$1,530.00 an ounce and 14-day RSI at 45.0.
* Silver support at $33.00 an ounce, resistance at $39.00
and 14-day RSI at 28.0.

Latest News

Gold under pressure as oil, silver, base metals slide

* Silver drops over 6 pct, main silver ETF reports outflow

* Dollar index hits three-week high, pressuring commodities

(Updates throughout, changes dateline, pvs SINGAPORE)

By Jan Harvey

LONDON, May 12 (Reuters) - Gold and silver prices slid on Thursday, with silver tumbling more than 6 percent, as renewed strength in the dollar and concerns over the outlook for economic growth sparked broad-based selling of commodities.

Spot gold XAU= was bid at $1,481.96 an ounce at 0952 GMT against $1,499.75 late in New York on Wednesday, having earlier hit a low of $1,481.85. Silver XAG= fell to a low of $32.88 and was later at $33.04 an ounce against $35.06.

Gold dropped more than 1 percent on Wednesday and silver nearly 9 percent as hefty gains in the dollar prompted selling across commodities.

They extended those losses as the dollar hit a fresh three-week high against a basket of major currencies on Thursday, while concerns over the financial health of some smaller euro zone economies kept the euro under pressure. [FRX/]

Dollar strength makes assets priced in the U.S. unit, like commodities, more expensive for other currency holders.

"External factors are playing the most important role here -- the firmer dollar, and secondly somewhat weaker equity markets which reflect higher risk aversion among market players at the moment," said Commerzbank analyst Daniel Briesemann.

"Given that commodities still show quite good price performance over the last 12 months and are still in positive territory, some market players are taking profits to cover losses elsewhere," he added.

Oil slipped 1.3 percent and base metals like copper and aluminium declined, as buyers of industrial commodities worried about the outlook for economic growth from major consumers China and the United States. [O/R]

Expectations that China will continue to raise interest rates to combat inflation is fuelling fears that the country's burgeoning demand for raw materials may ease. Higher rates and a consequent lessening of inflation fears may also weigh on gold.

SILVER VULNERABLE

Gold prices have dropped more than 5 percent and silver by nearly a third from the record highs they hit in recent weeks. Silver is underperforming gold after strongly outperforming it in the first quarter's rising market.

The world's largest silver-backed exchange-traded fund, the iShares Silver Trust, reported an outflow of more than 45 tonnes on Wednesday. Its holdings have declined by more than 480 tonnes since the end of April.

Increases in the amount of money exchanges require to trade silver have rattled futures markets, meanwhile. Speculators have liquidated long positions in silver in both New York and on the Shanghai Gold Exchange in recent weeks, pressuring the metal.

"While the long silver trade is a lot less crowded than it was earlier this month, news that the SGE will raise initial margins on the metal to 19 percent, from 18 percent, and widen the allowed daily range to 13 percent - both effective tomorrow - may spook those investors who are still long that further margin hikes will follow," said UBS in a note.

"The only thing we can be certain of in silver right now is that the roller coaster journey is going to continue for some time."

The gold:silver ratio -- the number of ounces of silver needed to buy an ounce of gold -- rose towards 44 on Thursday, having slipped to 31.7 in late April, its lowest in 28 years. From a technical perspective, it is finding support around current levels, but remains vulnerable.

We should have all been anticipating an end to the speculative bubble in Silver, and the advent of a bear market. Silver is the secondary play that without Gold would hold little interest. Silver's investment value is derived from Gold. It does not stand alone. When markets turn to the secondary play in a sector, we should always anticipate that the end is near. Lacking fundamentals, other than imaginary ones, to justify the speculative price bubble, Silver's collapse was a when not if situation.



While lacking a specific clay table, we can surmise what might have been on it had one been created. For example, rule one would be that when a debt financed advance in prices has occurred, expect a bear market to develop. Second, when the price drops more than 30% from the high, the smart money is on a bear market. Thirdly, when the market patterns change, as they have in the above chart, acknowledge that a bear market has developed.

In a bull market, the patterns tend to be as those indicated by the blue arrows in the above chart. Long advances are punctuated with sharp, short corrections. The reverse of that is what plays out in a bear market. Sharp, short advances give way to longer correction. Simply reverse the bull market pattern.

Repetitive sets of bear market patterns should be expected after the failure of Silver's parabolic rise. Such periods are without compassion for those that "fight the tape." A reasonable resolution of Silver parabolic pattern failure is a price target of $16.

I have read the "reasons" silver is a buy..and I'm not buying the logic. Too much "explaining" and zero technical support for the view....

ALL..every!...parabolic move of silver's proportions in the last 30 years have ended the same way..

We've seen a .70 retracement of the most recent move..but we are a freight train headed for the late January price of 26.38...if you think silver is a "bargain" at 34.00..just wait! Good investing, my friends!