Tread Carefully With Silver ETFs

The iShares Silver Trust (NYSEArca: SLV) was down only fractionally on Monday, the first day of the third quarter. SLV, the largest ETF backed by physical silver, is also down just 0.5% in the past five trading days. Obviously, that is nothing to brag about, but after SLV lost nearly 29% in the second quarter, some silver bulls are apt to cling to any glimmers of hope, no matter how faint those glimmers may be.

A case can be made that it was panic selling that crushed precious metals in the second quarter and that selling in silver ETFs is now overdone. “In our view the reaction of bond markets to Fed comments has been overdone, and ultimately real interest rates will fall back from current levels. It appears that the Fed agrees that bond markets have over-reacted and key FOMC members appear to be trying to talk rates back down now,” according to ETF Securities, the firm that issues the ETFS Physical Silver Shares (NYSEArca: SIVR).[ETF Securities: Metals Sell-Off Overdone]

Although silver ETFs have lagged their gold counterparts, investors stuck with silver funds until late June when some noticeable redemptions were spotted. On June 24, SLV saw a 192-tonne, or almost 2%, decline to 9,882 tonnes, its biggest daily drop since June 2012. [Silver ETF Holdings Plunge, Too]

The gold/silver ratio now hovers around 63, meaning it takes 63 ounces of silver to purchase one ounce of gold, but the near-term outlook for the white metal is troubling in the eyes of some metals market analysts.

“Since recent highs were made back in late August of 2011, lead month Silver prices have declined by just over 60%, and are now trading just above $19 per ounce after falling to nearly $18 on Friday — which is a price level not seen since the fall of 2010,” according to OptionsExpress. “The smaller size of the physical Silver market also has led to historically higher price volatility, which seems to be playing out in the recent performance for Silver prices during this historic precious metals bear market.”

Yes, silver smacks of being oversold, relative strength and other technical indicators confirm as much. However, recent slowing in selling pressure and any near-term bounce for silver could be no more than short-covering, highlighting the fact that investors may want to wait for silver futures to cross resistance in the $20 area before initiating new positions.