Silver went on an epic run from October 2008 to April 2011, rallying nearly 500% over a short 2 and 1/2 years. The move certainly got the attention of the speculators and many bought aggressively as silver prices surged higher. As with all great speculative advances, the buy-side eventually got overcrowded and folks got greedy as hot money piled into what is quite a small and volatile asset. Trouble soon arrived. Silver topped for the move in May 2011 at just under $50, and then spent the next three years in free-fall, declining by -63% in total to $19. Today, the silver chart is starting to look interesting once again. Silver is stabilizing around $19/oz and the propensity by speculators to drive the price lower looks like it is coming to an end. If that turns out to be the case, the next leg higher in the precious metals bull market could soon be upon us.
The punishing correction of the past 2 and 1/2 years has had the desired effect on investor sentiment and speculator positions. The latest Commitment of Traders report is quite revealing. In this report, the output of which is shown graphically below, a number of trends emerge. First, the "smart money" commercial traders (the silver miners in this case), who typically always hold a short position to hedge against their production, are currently holding one of their lowest short positions in silver in over 20 years. The large speculators (big hedge funds) typically take the opposite side of the commercial traders. The large specs have been all but chased out of the market and now hold one of their smallest long positions in the silver market in recent memory. It is the same story for the small speculators, who, despite increasing their position recently, still hold one of the smallest net long positions in silver since the bull market in precious metals started back in 2000.
Public opinion on the future prospects for silver is also at its lowest level in many years.
Silver is a notoriously volatile asset, generally tending to move in the same direction as gold but with much more violent swings. Despite these characteristics, silver is considered quite an effective inflation hedge. For those with a bullish bias on the outlook for precious metals, a mouthwatering opportunity may well present itself in the not too distant future.
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