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Be Careful About Buying Into The Silver Selloff
Thursday, May 5, 2011, by Stathis
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As many have noticed, silver has collapsed from a recent multi-year high of more than $48/ounce. In just a few days of trading, silver has dropped by nearly 30%. 

What has triggered this massive selloff?

In my opinion, the rapid selloff in silver has been due primarily to three factors:

1) Over the past two weeks, margin requirements for silver futures have risen by nearly 50%. 

But it gets worse. Effective May 9, additional margin requirements will boost this to about 95%.

2) Financial institutions have sold in mass in anticipation of the advervse affects of the margin increase (they have piled onto the short side; others such as hedge funds and large investors have simply sold)

3) Silver is experiencing a normal correction relative to the move it has made.

Combined, I feel these three factors have led to the rapid selloff in silver. Moreover, I do not think the selling has ended.

While silver could very well trade up from here, from a risk-reward perspective I would not enter a trading position. Silver is being driven by momentum. Therefore, it is best to piggyback onto a clearly developed trend. As such, right now we are seeing a very strong downtrend.  I expect this trend to persist over the next several days. 

Keep in mind that of all assets, trying to determine trading activity of precious metals is the most difficult because there is very little information that can be used to determine trading price and valuation. 

As I have been saying ever since discussing precious metals, if you decide to "invest" or trade gold and silver, the best time to buy them is when no one wants them, and the best time to sell them is after they soar.

 

 

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