Will Silver Go Above $50 … and Stay There?

Silver jumped 6 percent Thursday on the back of dollar weakness after Federal Reserve Chairman Ben Bernanke's dovish remarks Wednesday, but some analysts doubt the price can hit and stay above the $50 mark.

Silver prices rebounded Wednesday before Bernanke's news conference, following a 10.5 percent crash in Tuesday trading, but analysts were not convinced the rally would carry the metal much higher.

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Changes to the capital requirements for the purchase of silver futures on the New York Mercantile Exchange also dampened interest in silver, which saw frantic trading at the beginning of the week, analysts say.

A number of options expired on Comex on Tuesday. “It’s possible that Friday and Monday the market tried to push towards $50 where there were a lot of call strikes,” Walter de Wet, head of commodities research at Standard Bank, told CNBC.com. “But we trimmed it back to $45 where there were also a lot of call strikes.”

Prices were solid around the $45 level on Wednesday morning, and de Wet believes that the market will hit $50 within the next six to eight weeks. But not all analysts agree.

“A big part of the wobble was the increase in margin requirements on Comex futures and Shanghai futures,” said Tom Kendall, vice president for commodities research at Credit Suisse. “That led to a lot of profit taking and closing out of positions.”

Much of the intra-day spike on Monday that drove prices towards $50 was driven more by algorithmic and electronic systems trading on momentum than by market fundamentals, Kendall added.

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[SICV1  Loading...      ()   ] prices have climbed by almost 50 percent since the start of 2011 and hit highs of $49.820 on Monday. Investors have been looking for assets to store value as the Fed’s quantitative easing programs add to pressure on the dollar.

Gold and silver are perceived as hedges against global inflation, but the latter has also benefited from recovering industrial demand in Asia and from retail investors seeking to profit from its rise.

Additional Liquidity

Exchange traded funds have also allowed new groups of retail and institutional investors to access the metal, bringing additional liquidity into the market.

Investment demand as a component of total silver usage has been increasing over the past five years, according to research by RBC Capital Markets. In 2008, investors represented 5 percent of the total market for silver. In 2010, that had grown to 17 percent, according to the report.

With prices edging towards $50, and with hot money flowing in – and out – of the metal, buyers may need to weather further volatility in silver, which may concern retail investors.

For the short term, a collapse in the price looks unlikely, according to analysts. “The one thing that would really threaten [the current high prices] would be if Bernanke comes out and says something quite aggressive about how they’re going to tighten liquidity in the States,” said Credit Suisse’s Kendall.

The longer-term price outlook is uncertain, as industrial demand alone is not enough to underpin a price above $50. An easing in inflationary pressures and a return to positive real interest rates in the US could see investors lose their appetite for silver.

The majority of silver supply comes as the by-product of gold, copper, lead and zinc mining, with only 30 percent from primary mining, according to the GFMS World Silver Survey 2011.

Primary production is likely to increase over the next few years, easing longer-term supply constraints, according to RBC Capital Markets research on the sector. Above ground stocks of silver, particularly in China, a major consumer of the metal, are also believed to be recovering from lows in 2005.

“If you look at Comex futures, the market doesn’t look extremely overstretched, so I think you can make the argument that there is still physical demand,” de Wet said. However, he added that the cost of production of the metal remains low at around $18, “if a lot of production comes online and silver remains industrial-driven, we could see a fallback below 30.”

Fallbacks in silver tend to be quick, Kendall said. “If you look at it from a fundamental supply and demand view, you have to have a significant investment component to keep it above $50.”

“I think [a rapid decline] would be more likely than not. It’s characteristic of the silver market. It’s the most volatile of the precious metals, and when you get a correction across the asset class you expect silver to fall quickly,” he added.