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Why Silver Prices Won't Quit

NEW YORK (TheStreet) -- Silver prices are up 49% in 2011. Day after day the metal keeps hitting new 31-year records. Traders keep waiting for some kind of fierce and furious correction, but so far silver keeps heading higher.

Silver is now eying its all-time record it reached in 1980 of $50 an ounce.

One of biggest recent catalysts has been the U.S. dollar hitting its lowest point since November 2009. Now dollar-backed commodities must watch out for the $72 level, which is its 2008 low.

Mark Arbeter, chief technical strategist at Standard & Poor's Equity Research wrote in a recent note that if the dollar keeps sinking gold and silver "will enter blowoff stages." Arbeter predicts that silver could spike to $65 while gold could hit $1,650-$1,800 an ounce "before this part of its bull market ends."



A weak dollar isn't the only culprit. Technical trading, namely short covering, has also helped create this spike in silver prices.

The big catalyst for the shorts was most likely Goldman Sachs' (GS - Get Report) April 11 note that advised clients to sell commodities and called for a top in prices. But after an initial selloff, silver popped almost 14%. Now, short traders are getting squeezed.

Scott Redler, chief strategic officer at T3Live.com, trades the iShares Silver Trust (SLV) and tried to borrow more shares to short on Thursday morning and the clearing agency had to hustle to find more.

"So that just tells me that so many people are short and its being controlled on the long side ... I've been trying to make these cute trades in silver ... and you have some of them intraday but net/net it just keeps going higher ... I haven't seen anything like this since the bubble days of 1999," says Redler, "I think silver is ... a short term bubble."

The silver futures market has also been suffering the same kind of "mechanical" short squeeze. In the latest commitment of traders report, silver speculative short positions grew 12% from April 5th to April 12th, the latest data available, while long positions shrunk 5%. With a solid amount of traders betting on lower silver prices, the longer silver prices stay high the more traders have to buy back those short positions for a loss, which in turn, drives prices higher.

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SYM TRADE IT LAST %CHG
SLV $15.84 -1.50%
CDE $5.52 0.09%
GS $209.06 1.30%
HL $3.11 -0.96%
JPM $66.77 1.10%

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