The metal fell victim to heavy selling on Monday, dragging gold down with it, on U.S. dollar strength and as investors turned more cautious on precious metals as an alternate investment, said experts.
"We feel silver weakness has been a liquidation trade as investors grow increasingly wary of precious metals and traders are forced to close positions to meet margin calls elsewhere," said Stan Shamu, strategist at trading firm IG Markets.
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Silver slumped over 4 percent on Monday to $21.30 an ounce, leading gold down lower by 1 percent to $1,344 an ounce. At one point silver hit a low of $20.30, down 8.8 percent from the start of trade on Monday.
Shamu is not ruling out further downside for the precious metal, noting that he sees support at $20, a key psychological barrier for investors.
Warren Gilman, chairman & CEO of investment firm CEF Holdings, agrees that silver could face further downside pressure, even below $20.
"When we have short-term volatile trends, silver acts like gold, only it's more volatile, so it's not a surprise to see it come off," he said.
According to a Citi report, if silver makes a rebound back towards the $27-28 level it will present renewed selling opportunities.
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"Looking further forward, after nearly a decade of rising silver prices, we expect the combination of growth in mine supply and sluggish demand to continue to keep silver prices under pressure, though volatility will remain a characteristic of the market," the Citi analysts wrote.
Gold to Follow Lower
Silver, according to IG Markets, is a lead indicator of gold, and thus, the firm believes the yellow metal will extend its declines.
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Hedge funds and money managers are increasing their bearish bets against gold, according to data from the U.S. Commodity Futures Trading Commission. Gold futures saw 74,432 short positions as of May 14 - the largest short position since records began in June 2006 - compared with 67,374 a week earlier.
A combination of factors including strength in the greenback, absence of strong inflationary pressures and robust performance of global equity markets has lessened the appeal for the precious metal in recent weeks.
Gold, which suffered its biggest one-day fall in three decades on April 15, is still searching for a base said Gilman of CEF Holdings, which is becoming more difficult in the face of dollar strength. A stronger U.S. dollar is negative for gold because it makes it expensive for holders of other currencies.
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The yellow metal will fall into the neighborhood of $1,250 at which point support will likely kick in, he said.
"There's still a lot of confusion regarding precious metals. The market is bifurcated between three groups - the true believers who aren't worried about short-term price movements, the Warren Buffetts who don't believe gold has any value whatsoever, and in between, the financial buyers," Gilman said.
"Today, what you see is a classic unwinding of trades by financial investors...but you're not seeing selling by the believers in gold," he added.