Silver Hits Snag, Drags Gold Down

Metals correct, but more gains seen in long term

Losing 14% in the past four days, silver felt the pain of a correction that brought gold along for the ride. The former hit a three-week low, and U.S.July silver futures fell to $40.88 in midmorning European trading. That continued its 8% fall from Tuesday, when CME Group for the third time in a week increased margin requirements on the metal's futures. Earlier on it had hit its lowest level since the middle of April at $40.30 per ounce.

Reuters reported that gold followed, although not as quickly; spot gold was bid at $1,534.60 per ounce after reaching a record $1,575.79 an ounce on Monday; on Tuesday it had fallen to $1,540.38. COMEX gold lost as well, falling 0.3% to $1,535.80.

Commmerzbank analyst Daniel Briesemann said in the report, "It seems to be the same price pattern we have seen in the last few days: the silver price retreats heavily overnight then almost recovers losses in early trading before it retreats again in later trading." He added, "Generally speaking we still think that silver prices will come down quite significantly over the next few weeks. The price rise to the high at end-April was definitely exaggerated and a price correction was overdue; now it's going this way."

Silver has still gained nearly 45% so far in 2011 despite the correction; that makes it one of the top-performing commodities of the year. But analysts expect it to fall farther before it rises again, with gold being the more desirable of the two precious metals.

UBS said in a research note, "Even as gold has underperformed silver to the downside, so it should be seen as a buy much sooner than silver will be, perhaps closer to $1,500 where our one-month forecast sits." The note continued, "Silver, by contrast, could well move down to the mid-$30s, though a near-term rebound to the $45 area can't be ruled out—making the metal difficult to trade at present, whether from the long side or the short side."

Traders said in the report that once the correction is over, they expect gold and silver to continue to rise; problems such as increasing inflation and the ongoing unrest in the Middle East/North Africa (MENA) region have not ended, after all, and neither have concerns about low U.S. interest rates. Since all these are drivers of safe-haven investing in gold and silver, they may be expected to continue to drive portfolios in that direction.

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