Examining the Recent Silver Rally, Will It Last?
Silver had a big day on February 28 th as it sharply rose by 4.5% - the sharpest gain for silver since January 3 rd when it added 5.94% to its value. But, unlike yesterday's gain, the rise in silver back then was prompted by the sharp increase in gold when it rose by 2.15%. Yesterday gold price increase by only 0.76%. Since the big bump in silver it managed to tumble down by 6.89% on Wednesday and then bounced back by nearly 3% on March 1 st. So what is going on with silver? And what could stop silver from reaching the $50 mark within the next few months?
Up to the sharp fall on Wednesday, silver added 8.4% to its value within five days. This rally seems to be more than just driven by the increase in the price of gold. After all, in the last five business days the price of gold rose by only 1%. It doesn't seem to be a matter of "silver is catching up with gold" movement because as seen in the chart below the ratio between gold to silver is in its lowest level since September 2011.
Recall that between February and April 2011 silver increased by nearly 80% and reached a record high of $48.6 on April 29 th, 2011. Back then it was mostly a matter of speculative money entering the silver market. The price soon plummeted during the first few days of May after CME raised the margins on silver to cool down the metals market.
I suspect the same thing is currently occurring in the silver market - i.e. speculative money entering the silver market. This means if the silver market will heat again as it did back in 2011; it might prompt CME to raise margins again.
The recent rise in silver's volatility raises the chances for a CME market intervention, a step that will bring the silver rally to a halt, but if silver will cool down CME might refrain from intervening from the time being.