By Michelle Smith — Exclusive to Silver Investing NewsAfter three quarters of declines, silver's fortune changed as the metal posted gains for the first quarter (Q1) of 2012. Silver took off after the new year, rising to its highest level since September 22, 2011 on February 28, when it crossed the $37 mark. But leap day proved unlucky for the metal, and investors saw a sharp fall in prices. Though in US dollars silver managed to gain about 16 percent during Q1 2012, it is now marching to a different tune, calling into question whether that performance will be repeated in Q2. Q1 2012 revealed that optimism in the silver market was largely based on expectations of loose monetary policy. The EU played its part in satisfying the market's thirst for liquidity by announcing another long-term refinancing operation. That move, however, was not enough, as silver investors also want an injection of cash into the US economy. The Federal Reserve has not announced whether or not there is further stimulus in store for the US, but the market has proven so desperate that silver prices have been pushed around during the quarter based on what investors have read between the lines of Chairman Ben Bernanke's statements. The most dramatic example of Bernanke's impact on silver occurred on February 29, when his omission of stimulus suggestions prompted a dramatic leap day decline, a fall from which silver has yet to recover. Macroeconomic influence Throughout March, silver has been trapped in a struggle between the bears and the bulls. In addition to disappointment with US monetary policy, silver prices have shown sensitivity to macroeconomic news, with a particular focus on the EU, China, and the US. The debt situation in the Euro bloc has the ability to promptly reignite fear among silver investors. The metal has shown a positive correlation to the euro: it appears that when crisis is on the brink of escalation - such as during Greek bailout negotiations - silver suffers, but when such worries subside and the euro strengthens, silver prices improve.
China, with its supersized silver appetite and manufacturing muscle, is also of great concern to silver investors. Suggestions that its economy is in for a hard landing are a source of pressure for silver, and with people less inclined to dismiss this possibility, the outlook for silver is growing gloomier.Standard Bank identifies China as the most important consumer of metals, but notes that data flows continue to point to a slowing down of the most important components of commodity demand, including manufacturing. Standard Bank said it is cautious on China's economic growth and doesn't expect real strong commodity demand. In the US the economic climate seems to be improving. The data flows there are increasingly supporting such optimism, though Bernanke has yet to stamp the economy with his vote of full confidence. Still, when positive reports are released they tend to put further downward pressure on silver. If the US economy continues to improve, its currency will begin to look more attractive. As silver has a tendency to trade inversely to the dollar, the strengthening currency will likely intensify the pressure on the metal. Q2 outlook With no clear indication of a new cash injection, and potential economic troubles in key consumer regions suggesting a serious decline in industrial demand, silver investors appear to be growing increasingly skeptical. These doubts have largely been reflected in the futures market, where net speculative interest for COMEX silver has fallen off dramatically, shedding nearly 530 tonnes. Indian futures markets have started to take cues from international trends and have seen recent weakness. In March, investors starting selling off notable amounts of silver from their ETF holdings, though this past week over 22 tons were added. Still, the outlook for Q2 2012 is growing increasingly precarious, with the market looking for something from which to gain positive direction, but largely failing.
Standard Bank foresees silver declining near the $30 level and is patiently waiting for the fall. At that level, the bank sees value and potential for silver to reach $40, but not until Q3.Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article. 2012 Silver Q1 Market Trends and Outlook from Silver Investing News