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This Was Not the End of Silver: Opinion

Stocks in this article: PHYS

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ivan Martchev,

NEW YORK ( InvestorPlace) -- Investors shouldn't be surprised at the recent U.S. Treasury market rally or the precious metals selloff. It looks to me that the first leg of the selloff has been completed and we are in the middle of the proverbial "dead-cat bounce" -- after which a second leg will ensue.

This is because there is a huge amount of leverage in the silver futures market, and traders who get greedy tend to pyramid their positions and tighten stops, pushing the market beyond the level it otherwise would go to without such leveraged strategies.

When too many traders lean on one side of the market, it increases the chances of a violent move on the opposite direction of the market -- magnified by the very leverage that caused the price to soar to unwarranted levels.

The conspiracy theorists say that it was the exchanges that hiked margin requirements for futures that caused the selloff, and of course the exchanges say they're only protecting themselves from losses that would result in the event of a market selloff. The same process repeats over and over in the futures markets, but it is sad that so many people get caught on the wrong side of the market every time.

  • Related Article: 5 Ugly Truths and 5 Myths About the Fed

  • Silver is not the only metal that is prone to violent moves, but because the market is so tiny in financial terms compared to its more expensive cousin, gold, it can move at literally twice the rate to the upside and the downside.

    At one point the Sprott Physical Silver Trust (PSLV) was trading at a near 29% premium to its NAV, which is a ludicrous price to pay and an indication of too much bullish sentiment (a contrarian signal of sorts). Nonetheless, the PSLV trust is a highly innovative product that allows buyers to cash in their shares (as long as they meet certain minimum levels) in exchange for physical silver bullion.

    What buyers of those innovative securities fail to keep in mind is that unless they hold the necessary minimum amount of shares, they cannot cash them in. It is true that there is audited physical gold and silver bullion in those trusts sitting in a vault in Canada, but paying a 29% premium for that certainly is not how smart investors should approach precious metals.

  • Related Article: Why oil prices will flop to $90 or less
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