Silver Price Forecast This Week: Downside Speculation Mounting

Silver Price ForecastSilver Price Forecast this Week: Silver speculators are mounting their short positions, meaning that silver prices are likely to continue to struggle in the near term.

But investors who hold silver through this short-term weakness are soon to be rewarded for their patience.

As it stands, speculators have out about 21,600 short contracts on the white metal representing 108 million ounces of physical silver, a 19.2% increase from the week before, according to data from the U.S. Commodity Futures Trading Commission. It's also a 71.2% increase from two weeks ago when short contracts were at their lowest levels on the year.

This means that silver is currently in a cycle of growing short positions, which suggests that at least for a little while, silver investors are going to have to absorb some losses before there are any advances.

Also working against silver in the last week is that there was no rise in the number of speculators going long, providing no support for price growth in the face of increasing shorts.

But this is going to reverse itself in due time...

How Speculation Fits In to the Silver Price Forecast

Typically, silver - like gold - will move on negative economic conditions.

Recently, turmoil across the globe in places like the Gaza Strip, or on the Ukrainian-Russian border, has to some extent provided a safe haven for investors looking to move away from the dollar and equities this year.

But macroeconomic events alone are a difficult indicator of silver price movements, as the small size of the silver market creates high levels of volatility. So while a spike in investor interest can help silver make quick dramatic advances, it can also just as quickly have its gains erased when investors pull back.

A good recent example of this was last month, over concerns of the Portuguese banking sector. Silver soared when Portugal's second-largest lender, Banco Espírito Santo SA, revealed on July 10 that its retail clients were holding the commercial paper of its parent company, a company that had just two days earlier announced that it was going to miss payments on those debt obligations. Panic ensued and silver jumped 1.5% on the day and peaked at three-month highs of $21.47 an ounce.

But over the following weekend, it became clear to markets that those events were fairly isolated, and that only the Portuguese bank was going to suffer, not the Eurozone as a whole. Silver investors pulled back. On Monday, silver saw a 2.5% decline, erasing the previous week's gains.

Speculation, however, has been a fairly consistent silver price predictor in 2014.

So far this year, silver prices have had a correlation of -0.86 with speculator short positions, bets on silver prices falling. Statisticians will generally look for a correlation of between -0.7 and -1 to determine whether there is a strong inverse correlation between two variables.

With inverse correlation as solid as it is, this suggests that as short positions grow, silver prices will fall. And on the other end, when shorts reach a peak, silver prices reach a low and are poised to gain.

"When there are few shorts, that leaves the price vulnerable to renewed short selling," managing partner at CPM Group, Jeffrey Christian, wrote in an email to Money Morning. "So, too, when there are a lot of longs, that leaves the price vulnerable to profit-taking selling by the longs."

So far, there have been two periods of silver shorts moving to peaks that were followed by a period of short contract liquidation and coinciding silver rallies.

The first was in early February, when short contracts totaled close to 34,000. In the period of liquidation to follow, silver gained 12.3% in just two weeks.

The second peak was reached after a three-month bear session, where shorts mounted from mid-February to early June, when they hit record highs at around 49,000 contracts. The short contract sell-off period to follow was protracted, lasting from early June to late July, and delivered gains of 9.3% just before the shorts began to grow again.

Right now short contracts are still well below their peaks on the year. With short contracts at about 21,600, there is still room for that total number of contracts to grow, and for silver to continue to fall before a peak is reached.

But with silver speculation in 2014 providing a pretty clear picture of where silver prices are headed, the more this number grows, the bigger the gains and the longer the rally after that peak is reached.

More on profiting from today's market volatility: Economic skirmishes like the situation in Russia can quickly escalate into all-out trade wars, where even the victors lose. But you don't have to be another victim.Here's how you can understand, and profit from, this surging European volatility...