Silver Declines into $20s as Dollar Rallies

While the US dollar rallied, silver prices declined further into the $20s this week. The metal found itself entangled in a web of negative sentiment prompted by uncertain global economic conditions.

Concerns about Europe continue boiling over into the markets. Spain and Italy held auctions, and positive demand for both countries’ debt helped to temper some negative sentiment, but it is still a concern that both countries’ yields are over six percent. Soft EU industrial data was another source of pressure for silver this week.

But overshadowing all of this news is Greece, which was unable to form a government and therefore will be heading to the polls in June to elect what many suspect will be an anti-austerity government. Speculation about the country leaving the euro is at elevated levels.

Statements such as those made by Christine Lagarde, Managing Director of the IMF, have done little to help, especially in a silver market that appears to need positive sentiment to drive demand. Lagarde said that Greece’s exit is within the range of multiple options and that what happens to one member of the union will affect the others.

Furthermore, the market is also concerned about China. April data was largely disappointing, and the markets seem to be finding more ways to convince themselves that the nation is indeed facing a significant slowdown.

This weekend China will cut its reserve requirements, lowering the amount of money that banks are required to hold. This easing measure is an attempt to stimulate the flow of cash in the Chinese economy. While this action could have been bullish for the metal, it has not been. On the contrary, it has been widely viewed as another piece of negative evidence.

Investment demand is also grim. For the fifth week, net speculative length of COMEX silver has declined. Standard Bank reported a 513.9 tonne fall for the week, describing it as “tremendous” and adding that this brings the total decline for the five-week period to 1,423.9 tonnes. The dramatic 646.9 tonne increase among shorts is the the largest increase of the year, the bank said.

The 75.8 tonnes of metal dropped by ETF investors brings the total liquidations from these investments to 188 tonnes over the past three weeks, which is half of the year’s gains. And significant liquidations of silver are reported to have occurred in the the Asian markets this week.

Meanwhile, fear, uncertainty, and aversion to risk have had the US dollar wallowing in safe haven cash. On Wednesday, the greenback hit a four-month high while silver dropped to the lowest level since December 29.

Silver put up a fight on Thursday. That was the first day of the week that the metal managed to close above the previous session. Some support was said to have come from the Federal Open Market Committee minutes, which revealed that further quantitative easing remains on the table if it is needed. Bargain buying and short covering were also factors in the price increase.

However, Thursday’s positive move for silver did not come at the expense of the dollar, and that has some in the market skeptical about the longevity of the price rise. The strengthening dollar played a role in the fall of silver prices in Asia earlier this week, when prices in that region dropped to the lowest levels since January 3.

“If crude oil continues to trend lower and the dollar index continues to trend higher, sustainable near-term price uptrends in gold and silver will be difficult to achieve,” wrote Kitco technical analyst Jim Wyckoff.

The close

At 1:41 p.m. PST, July silver on the COMEX was $27.95. Spot silver in New York closed at $28.04, up $0.78.

Silver miners also appeared to be benefiting from improved sentiment on Thursday. Mid-Canadian session, most were green, with some showing double digit gains in percentage terms.

Company news

Santa Fe Gold (OTCBB:SFEG) announced that the Summit silver-gold mine has reached full tonnage output. Having reached the ramp-up target extraction rate of 10,000 tons of ore per month, the company expects silver and gold output to increase over the next several quarters as higher grades are encountered.

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