CPM Group: Lower Prices and the Potential Bull Trap

CPM Group has made some assessments about the silver market that many investors will not like. The firm recently updated its Silver Long-Term Outlook, which gazes out to 2022, presenting an argument for weaker silver prices over that period. The firm also released a report that suggests many investors may currently be at risk of getting caught in a bull trap.

Silver has been trending lower since April 2011, when “hype” pushed prices to $49, according to CPM Group. Prices plunged the following month and have traded between $26 and $36 since September 2011.

Recently, silver has not performed as many market participants insist that it should. The strong price action that is supposed to be seen at times of heightened economic risk has often failed to materialize. But some market observers continue to hypothesize that silver prices will head higher, CPM Group’s report states.

Long-term silver outlook

Silver investors were net sellers for well over a decade. CPM Group notes that since 2006, economic and financial crises have fueled interest and investors have been net buyers.

“The single most important question facing future silver prices is how much silver investors will want to buy going forward — or whether they might revert to long-term selling as they did only a few years ago,” the firm said.

CPM Group claims to have identified several emerging trends in the market that could result in wobbly investment demand over the next decade and may weigh on prices going forward. Using this information, the firm makes a case for lower silver prices over the next decade.

Its assessment points to developments that have reduced silver demand over the past decade, including higher silver prices and technological advancements such as digital imaging and smaller electronic components. There is also the possibility that a substantial amount of silver mine production capacity may be added over the next 10 years.

Beware of the silver bull trap

In a recent market note, CPM Group addressed the current state of the silver market, warning that seasonal strength could result in a bull trap.

In early January, silver could be found below $30. Moderate price increases seen later in the month, together with marketing hype, reignited bullish sentiment among some investors, the firm said.

Peddling concern about a supply shortage is one of the tactics that these “marketing hypesters” are using. To help lend credibility to their story, they point to the fact that the US Mint temporarily suspended the sale of the 2013 Silver Eagles after the coins sold out last month. Once sales recommenced, January ended with 7,498,000 coins sold. That all-time monthly high provides fodder for the portrayal of the marketplace as raging with demand for physical silver.

CPM Group notes that it was all simply a ripple effect. The Mint estimates annual production. Last year, fiscal cliff talks sparked a surge in demand that was especially notable in November. When December rolled around, the 2012 Silver Eagle sold out. The 2013 coin was then released into a market with pent-up demand, so it too sold out.

CPM Group points to an ample supply of good delivery bars to meet surging purchases by ETFs and COMEX-registered depositories. The firm notes that there was a 19.4-million-ounce increase in silver ETFs on January 16. Yet there were no delivery disruptions reported.

“All of this talk about a shortage of silver is irrational and not supported by readily available market data,” the report states.

Silver is produced in 242 mines located in 38 countries, the firm notes. Furthermore, the firm calculates that 27 billion ounces of silver exist above ground. 90 percent is held by individuals in forms such as jewelry, silverware and decorative items. The balance is in the form of investment products. All of this metal is theoretically available for sale to investors.

“Conspiracy theorists” try to get listeners to imagine scenarios that CPM Group suggests are quite far fetched. Popular among them is a situation where all investors demand delivery of the silver they hold through ETFs, banks and futures contracts.

While CPM Group admits that this “unlikely phenomenon would obviously push prices higher,” the firm also points out that such a scenario implies a situation where the market is devoid of sellers.

“This is why every bubble has burst, because at some point, those buyers become sellers.”

The firm warns that extreme scenarios concocted by silver marketing groups should never be the basis for rational investing.

Short-term silver outlook

Seasonal strengths in investment and fabrication demand pushed prices higher in January and some other factors could drive prices up later in February. But they are minor and do not represent convincing justifications for expectations that prices will rise significantly higher in the longer term, the firm believes.

Between now and March, prices could reach the $34 to $36 level. CPM Group notes that there is often an elevated level of congestion in the market ahead of COMEX March futures expiry, a result of seasonal demand strength.

“Should a run up in prices occur before this period, silver prices could drop shortly thereafter, possibly toward $26,” the firm said.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.

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2013 Silver Eagles Already Sold Out