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Silver Prices Are Surging, but Can It Last?

Friday, 18 Feb 2011 | 4:50 PM ET

Strong investor demand, apparent in record coin sales and steady exchange traded fund inflows, has sent silver futures to their highest prices in 31 years.

April silver futures surged over 8 percent this week to settle above $32 an ounce. The silver ETF, iShares Silver Trust, which launched in April 2006 and tracks silver futures, rose 2.4 percent Friday to finished the week at an all-time high. Trading volatility in oil and precious metals intensified over the last few days as protests erupted in Yemen, Libya and Bahrain. News about Iranian warships going through the Suez Canal added to investors' jitters.

But the buying in silver wasn't only fueled by investors looking for a safe haven due to rising tensions in the Middle East. "Silver has been in a secular bull market for over a year," notes trader John Netto, president of M3 Capital. "This is not a fear trade or a trade to control risk." Indeed, silver futures have skyrocketed 105 percent in the past 12 months. While gold prices hit a nominal all-time high above $1400 an ounce earlier this year, silver is still nearly $20 shy of its record peak. Many traders, like Netto, believe silver has far more room to run.

Some traders say silver’s 6 percent spike over the past two days was the result of a short squeeze. Others point to the fact that backwardation is in full effect, with front-month silver contracts trading higher than future months, indicating that investors are interested in taking delivery of the physical commodity.

Commodities Next Week
CNBC's Sharon Epperson discusses the day's activity in the commodities markets, including violence in Bahrain and a potential spillover into neighboring Saudi Arabia. She also looks at the growing demand in the silver market, as well as other metals.

After this past week's rise, silver could be poised for a slight pullback in coming days. "There's been some gossip in recent days that producers may lock in some of the recent price gains with forward sales," says Jeffery Nichols, managing director of American Precious Metals Advisors. "News of actual forward sales could weigh silver down or trigger a correction."

But, in the long run, silver's standout performance this week should set the stage for further gains. MF Global precious metals analyst Tom Pawlicki says technically the next big resistance area for silver is near $36.50 an ounce—a 10 percent gain from Friday's high. Considering the pace of this past week's climb, it may not take too long to get there.

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