Silver Drops 27% After 30-month Rally

Silver dropped the most last week reminding investors of the sudden move in the metal in 1980 and the volatility in Internet stocks in the late nineties. The recent surge in trading volume in silver indicates a strong interest from retail investors that may presage lower prices ahead.
The price of silver tumbled this week reminding investors of the sudden decline last seen in March 1980. The thinly traded silver future plunged this week 27%.
The May future dropped 2.6% on Friday to $35.06 an ounce and more actively traded June contract declined 2.6% to $35.63. In the week, immediate delivery gold future dropped 4.1%.
The sudden reversal in silver dragged down prices of gold, crude oil and copper but commodities traders remain divided on the future direction of silver price.
The closely watched ratio of gold and silver prices had shot up to 63 before last week and declined to 42 at the end of the week, but still above the 30-year average between 30 and 35.
After the financial markets meltdown in 2008, silver prices dropped to as los as $9 an ounce and shot up to $50 in the last 30 months.
Optimistic investors’ view the latest price decline as opportunity and make the case that the U.S. dollar’s recent gain is temporary and the dollar remains in the long term decline.
The elevated U.S. government budget deficit and rising commodities prices have fueled inflation that the Fed has still not recognized and views as “transitory.” The ongoing inability of the U.S. government and politicians to focus on cutting total deficit has emboldened many investors to increase their exposure to precious metals.
However, several large commodities traders do not see any price appreciation possibility for silver in the near term. These traders content that silver price will be anchored to gold price and the price ratio between the two is expected to hover between 35 and 40.
Of course, lot will depend on what happens to the U.S. dollar, how the euro-zone crisis evolves and gold price trajectory based on the demand from China, India and the Middle East.
However, central bankers favor gold and not silver in their holdings and so far silver has found its market among individual investors. Close examination of trades on New York and London exchanges shows that average purchase of silver tends to be less than $1,500.
The latest move in silver price also shows the sudden burst of demand from retail investors. Since last August the silver price has soared 165% and gold jumped 25%.
However, silver is prone to more sudden price reversals and is expected to test $30 price level in the next four weeks. Several commodities traders anticipate the $30 price level a crucial test for the precious metals but are also cautious to go long on gold and short silver for the next few weeks.
The recent run up in the silver price reminded hey days of days of Internet stocks trading in the late nineties.
Trading volumes in silver exchange traded fund iShare Silver Trust has rocketed from the low of weekly average of 11 million shares in 2006 to 750 million shares on April 29.

(Source: http://www.123jump.com/market-update/Silver-Drops-27-After-30-month-Rally/44121/)