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) 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.

"Open interest ... gained very little in the past few days indicating big short covering and large amounts of option activity," says George Gero, senior vice president at RBC Capital Markets.

Another possible unconfirmed theory is that big institutions are also covering their short positions. JPMorgan ( JPM) was rumoured to have done just that at the end of 2010 after becoming the target of a criminal investigation by the Commodity Futures Trading Commission for manipulating the silver price.

However, in the CFTC's latest bank participation report for April, short futures contracts were relatively unchanged from a year earlier and up almost 17% since the start of the year.

This isn't to say that silver is rising only on technical factors. Silver as a safe haven play, as a cheaper alternative to gold, as a sought-after industrial metal are all real factors, but the feeling is that the extra recent juice in the market is technical and when the music stops the metal will correct.

But to what level? No one seems willing to say. Redler says he needs to see some kind of reversal to call a bottom and Anthony Neglia, president of Tower Trading, says he would bet on $50 silver before $40.

Silver's 2011 low as been around the $26 level, and when silver's bubble bursts its usually hard, fast and painful. After reaching its record in 1980 of $50, the metal plummeted 50%.

One thing is for certain, silver's future mojo will be depend on Ben Bernanke's press conference after the Federal Reserve's next FOMC meeting on Wednesday April 27th. Any clarity on a third round of quantitative easing or specifics on continuing to reinvest profits from QE2, committing to the Fed's current balance sheet, and silver shorts will have to cover. If recent dollar weakness rattles the Fed enough to consider squeezing money out of the market, this could be the catalyst short traders have been waiting for.

Silver stocks that have struggled to match silver's surge instead have been marred by outside factors. Coeur d'Alene Mines ( CDE) has rallied 16.17% year-to-date, Hecla Mining ( HL) is down 16.64%, Silver Standard ( SSRI) is up 28.63% while Pan American Silver ( PAAS) has lost 8.44%.


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-- Written by Alix Steel in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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