Silver Price Forecast: End-of-Year Rally to Start in September

Silver Price Forecast 2014: While August provided hope that silver prices would rebound from a disappointing July, speculation kept a lid on price gains.

But September promises to be a more productive month, and the factors that kept the white metal subdued in August trading are slowly fading away.

There is early evidence that silver is beginning to pull itself out of the current bear session that has produced six straight weeks of losses. For the first time since July, silver looks poised to finish trading up on the week. As of yesterday's (Thursday) close, silver had gained $0.085 since last Friday, and has finished up the last three days of trading for the first time since early July.

This welcome change comes after silver has plunged as much 9.8% from its highs of $21.445 an ounce in early July. In August, silver has so far lost 4.4%, its second-worst month on the year.

Similarly, silver futures contracts are down 4.2% to $19.61.

And exchange-traded funds (ETFs) backed by silver are also trading down in August. The iShares Silver Trust (NYSE Arca: SLV), which is backed by silver bullion held in vaults in London and New York, is down 4.3% to $18.74, while ETFS Physical Silver (NYSE Arca: SIVR) is down 4.4% to $19.28.

Despite a wide range of silver investments taking it on the chin this month, September will likely provide a boost for the bulls that had strong stomachs during this short-lived slump.

Here's what is going to help silver reverse course next month…

Silver Price Forecast: The Factors Leading to September Gains

A big factor in this bullish silver price forecast is activity in the futures markets.

Actions in the silver futures market is an important indicator of where prices are headed because in a period where speculators are building up short contracts – paper bets on a price decline – it puts downward pressure on prices.

Since bottoming out at the end of July, speculators have been building up short contract positions, holding 12,063 short silver positions backed by about 63 million ounces of physical bullion on July 29, and increasing those positions more than twofold to 27,646 contracts backed by 138.2 million ounces as of the most recent data.

But when short contracts build to a peak and silver hits new lows, speculators will begin to liquidate their shorts en masse and buy new long positions – and as the following chart illustrates, that's been bullish for silver.