Silver's shine is fading fast, and the market for the precious metal may have reached a top in a speculative, mad dash by ETF investors.
"The last move higher over the last month or so has really been driven by the strength of the retail investment demand, so the levels up here are not supported," said Suki Cooper, precious metals analyst with Barclays Capital.
"At levels above $40, we've seen some concern rising on the industrial demand side. The last leg higher has been investment-driven, rather than fundamentally supported. In that respect, the correction was due. I would say from a demand support point of view, we have levels that have been tested in other metals, but we haven't had a chance to test that in silver," said Cooper. "I think now prices are going to test where physical support comes in."
Silver has tumbled in the last two days, with Comex futures losing 10 percent on Tuesday alone, and the July contract finishing at $42.585 an ounce. Silver came within reach of $50 an ounce last week, and its all time nominal high, just above that level. The popular iShares Silver Trust ETF lost more than 5 percent Tuesday, on volume of more than 211 million shares.
"At the moment, the floor is going to be provided by a pickup again in retail investor interest, or it's going to be provided as we've seen in other metals, where physical demand comes in to buy support."
Moves by the CME to curb speculative buying with three increases in margin requirements in the last week have helped cool the metal's run.
"When something's on fire, there's lots of finger pointing. You've seen it in oil, and you're seeing it now of course in silver," said John Stephenson of First Asset Investment Management, in an interview on "Fast Money," in response to a question on the increase in margin requirements. Stephenson does not think silver's best days are behind it, and he expects the metal to reach $60 an ounce by year's end.
"The last two days have been pretty disappointing for people like me who are bullish silver," he said. But he added the world's awash in money looking for a home and gold and silver will continue to be magnets for it.
A larger-than-expected interest rate hike Tuesday by India and a slowing in Chinese manufacturing data earlier this week also led to selling in silver, which helped pull down other commodities. Commodities were also lower with emerging markets, on growth concerns.
Silver, up 150 percent since August, has been one hot commodity and it has been dubbed the "poor man's gold," as investors flocked to it while gold prices rose to $1500 and higher.
On the industrial side, silver is used in photography, solar panels, cell phones, computers and cars, in addition to jewelry. Cooper said at $50 an ounce, silver becomes 16 to 17 percent of the cost of producing a thin film solar panel.
Cooper said the latest buying frenzy was driven by investments in ETFs and silver coins and bars. At the end of April, for instance, eight silver ETFs held 15,486 tons of the metal, up from 14,582 tons in February. The April total was up just 10 tons from March, but at the same time, speculative accounts declined.
Speculators, which would include hedge funds, held 3,887 tons as of April 26, down 1,877 tons since Feb. 8. The all-time high for speculative holdings was 10,904 tons in late 2004, she said
"At the moment, the floor is going to be provided by a pickup again in retail investor interest, or it's going to be provided as we've seen in other metals, where physical demand comes in to buy support," she said.
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