Remember the last silver correction eight months ago?
In just a few days, the shinning metal lost close to 35 percent of its value, dropping from the high 40s to the low 30s—catching by surprise all those who believe that the heavy metal can defy gravity in the land of near free money.
In the months that followed, the metal recovered nicely, however. The iShares Silver Trust (NYSEARCA:SLV) rallied from the low 30s to the high 30s—drawing the enthusiasm of traders who believe that the correction in the price of the metal was just a pause in a secular rally. But do fundamentals support such a belief?
We don’t think so. As we wrote in a previous piece, silver is a good short—better than gold because silver has appreciated much faster than gold in the last two years, an anomaly, as gold has traditionally appreciating faster than the silver. And the fact that silver is more sensitive to a weakening economy that may be in the cards—and recent evidence confirms that such a weakening is already a reality.
Here, I want to add another factor that may cause a sharp correction to both silver and gold (NYSEARCA:GLD): The bursting of the Chinese real estate bubble that is expected to depress demand for commodities across the board. Compounding the problem, Europe’s contraction has begun to take its toll on Chinese exports depressing further the demand for industrial metals. Already copper, steel, and coal prices have been dropping sharply, and silver cannot escape this trend.
Sure, China may decide to change policy, reflating the bubble again, as it did a few times in the past, but until we see get some visible signs of such a shift, silver will yield to gravity, heading towards the low 20s before it heads towards 40s.
Disclosure: I am short SLV.