Silver prices got a boost yesterday (Wednesday), giving brief relief to their three-month downtrend.
The white metal rose on short covering and bargain hunting purchases. As gold touched on a new low for the year before rebounding, silver closed in on $27.983 for the July contract, up 19.2 cents. But silver priceshave dropped in 16 of the last 21 trading sessions through Wednesday. So why the volatility?
Here's what's weighing on silver—and why a price rally is still to come.
The Bears are Out
It hasn't been a pretty marketplace and as we enter the summer months. We've seen Facebook fall flat with its IPO, questioned whether Greece will leave the Eurozone and asked if Spain is in more serious trouble than initially thought.
The troubles have weighed on silver prices. Silver spiked to over $35 an ounce (oz) in late February, but has since slipped back near $28/oz, where it started the year.
Just in the last month, the Global X Silver Miners ETF (NYSE:SIL) has fallen almost 19%. The month isn't quite over yet and there are still hurdles for silver prices to face. The U.S. economic growth numbers just released Thursday showed Q1 growth slowed to 1.9%, down from a previous estimate of 2.2%. The latest U.S. employment numbers will be released Friday.
This data combined will give a preview of what the Federal Reserve policymakers could hash out at their June meeting.
And should Spain ask for a bailout of Greek proportions, metals could drop in the short term as investors run to the safety of the dollar.
But the long-term silver prices outlook remains bullish, as we told you a few weeks ago. "The long-term bull market is still very strong," Charles Morris, who oversees about $2.5 billion at HSBC Global Asset Management, told Bloomberg News earlier this month. "Silver spends more time going nowhere than it does going up, but when it goes up it tends to do it very quickly." Silver's next upside breakout has been forecast to come between $29 and $30/oz, where it's trading now. What will help boost the metal higher?
Shanghai Futures Exchange Is Live
On May 10, the Shanghai Futures Exchange (SFE) began trading silver futures and got off to a good start.
As the world's leading silver producer and the second-biggest consumer of the precious metal, expectations are high for the contract not only for China but worldwide.
At its launch Huo Ruiron, vice president of SFE, told China Daily that the trading will provide the country with a pricing mechanism for silver, improve management of silver-related enterprises and change the structure of the silver industry.
The move toward adopting the contract will be a work in progress, but recent silver volume on the Shanghai Gold Exchange hit a six-month high and it has been attributed to the new silver futures product.
UBS said of the activity in a May 25 commodities briefing, "The additional platform for trading silver in China could well have rekindled investor interest, offering the possibility of arbitrage opportunities, particularly given the added incentive of relatively cheaper margin requirements on the SFE."
Future Silver Prices
Brighter days for silver prices could come in the next few weeks. After the announcement of this week's pending economic numbers, market watchers will then focus on the upcoming FOMC meeting on June 19-20, followed by a Federal Reserve Chief Ben Bernanke press conference.
A solid statement from the FOMC meeting announcing new easing, instead of its more recent waffling statements, will get a silver bull market going.
Any optimistic economic news could flip the rally switch.
"A greater amount of confidence in the global economy generally means higher growth and that means more silver demand. If you look out beyond the end of the year, you can still see reasons to be bullish," David Jollie, a Mitsui & Co. Precious Metals Inc. analyst, recently told Bloomberg News.