The Six-Week Silver Price Rally Ends on Summer Trading and Renewed Confidence

Barring a big surge later in the day, silver prices are likely to finish down on the week for the first time since the last week of May.

The recent silver price rally has been the longest of the year, sustaining six weeks of gains for a 14.4% growth in prices. Silver was trading at $18.80 per ounce at the start of June, and closed out the six-week rally at $21.50.

There were some quick gains late in the week, as investors sought shelter from geopolitical unrest and a more than 160 point drop in the Dow Jones Industrial Average. But they weren't enough to recoup a 3.5% drop that opened the week.

Silver's biggest lift came yesterday (Thursday) on news that a Malaysian Boeing 777, en route to Kuala Lumpur from Amsterdam, was downed at the Ukrainian-Russian border, killing 298 passengers while the culprit still remains unknown. Add to that Israel's invasion of the Gaza Strip, triggered by a breakdown of ceasefire talks between Israelis and Palestinians, and the cumulative effect spooked investors. Silver, which along with other precious metals is a safe-haven investment in times of uncertainty, climbed as high as $21.30 an ounce.

On the day yesterday, it closed up at $21.20, up 1.8%.

However, it was trading down at $20.75 as of 12 p.m. EDT today (Friday), as the major indices began to rebound from their big losses yesterday.

Silver's Unprecedented Summer Rally

Title: Silver Price Rally - Description: Silver prices rallied six weeks straight -- a 2014 record. This six-week rally has been a departure from the historic pattern for silver prices. Generally, as markets move into the slower summer months, trading volume stagnates and the prices stall out. But as silver began to trade at its lows on the year going into June - below $19 - the futures traders took note. A heavy volume of short positions were closed and investors began buying long to help give silver a boost.

It sustained this initial jump after the U.S. Federal Reserve met for its Federal Open Market Committee (FOMC) meeting later in the month. Following the meeting, Fed Chairwoman Janet Yellen struck a muted tone on inflation and indicated that the Fed's policy of near-zero interest rates was going to be pursued for a considerable period. Because low interest rates are a stimulative monetary policy, a prolonged period of low rates has the potential to accelerate inflation, and silver is considered a hedging instrument against a weakening dollar.

Silver prices rode this momentum well into last week, and while trading volume began to slow and prices were sliding, likely a sign of profit-taking at the new highs and the onset of the summer doldrums, panic over the Portuguese banking system provided another lift to silver prices.

Last Thursday, Portuguese financial authorities announced that the country's biggest lender, Banco Espírito Santo SA (BES), was suspending shares after steep losses.
Those losses came as a result of uncertainty surrounding BES's parent company Espírito Santo International SA, which faced scrutiny over its financial health after it missed payments on some of its commercial paper.

The release of FOMC minutes from the June meeting, which reaffirmed Yellen's relative silence on interest rates, also kept silver trading up.

Though as the weekly gains began to shrink, it became inevitable that silver would at some point begin to fall. When BES reshuffled management and assured the financial sector that it would not falter in the same manner its parent company did, investor confidence rebounded and silver lost its luster, dropping 3.5% to begin the week.

Silver Prices Begin to Lose Momentum

The losses were partly influenced by investors "backing away from the view that the Portuguese bank problems represented a serious threat to the European banking system as a whole," Jeffrey Christian, managing partner at CPM Group, wrote in an email to Money Morning. "Perhaps investors had a weekend to let the news sift through their brains, and realized the sky wasn't falling?"

There was also renewed short selling, Christian added.

Money Morning's Resource Specialist Peter Krauth, who still sees strength in silver throughout the rest of the year, sees this drop as a natural move in the market and not a sign of silver losing its value as an investment.

"I have to say that I do think this is simply the market's healthy process of profit taking," Krauth said. "It had a good run lately."

For silver to renew its upward trend, it's going to have to hit important benchmarks, Krauth said.

"I think we need to see silver close above $22 and remain there," Krauth said. "It's the last high it tried to best twice in February, but couldn't quite beat. That will be a strong bullish sign of a new run-up."

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