Why Silver Could Hit $50 an Ounce This Week

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Includes: AGQ, GLD, GLL, SLV, UGL, ZSL
by: Yatin Karnik

U.S. gold rose to a record high for a seventh straight session on Thursday, its longest string of record highs since January 7. The metal's rise was modest-- Gold rose $2.60, or 0.17%, to close at $1504.60 an ounce. Gold prices hit an intraday low of $1500.50 and a high of $1508.90 an ounce. Gold prices are now above its Bollinger band's upper band. Relative strength indicator is sitting at 73.63. In recent weeks, gold has been making higher highs and higher lows. This sets up very nicely for another leg higher. Rising open interest accompanied by heavy volume is a technically bullish signal.

Silver futures prices for June delivery, now the most active contrast, rose $1.35, or 2.99% for a seventh straight session as well, to close at $46.57 per ounce on the Comex in New York. Silver prices hit an intraday low of $45.03and a high of $45.65. Both gold and silver made record highs and 31-year highs in Thursday's session.

Silver is up 51% in 2011, hitting new 31-year records day after day. Many traders keep waiting for some kind of correction, but silver keeps heading higher. Some traders have made unsuccessful attempts to short silver, hoping silver prices will fall hard. There are many reasons why silver keeps heading higher, a reason on the top of the list is U.S. Dollar weakness. As long as the U.S. Dollar keeps sinking, precious metals will keep making higher highs.

On April 11, Goldman Sach (NYSE:GS) advised clients to sell commodities and called for a top in prices. Some traders followed Goldman's call and shorted silver. These traders think silver is in a short term bubble, but the market has been ruthless to skeptics, with silver rising over 2% almost every other day. This short squeeze makes silver rise even higher. In the latest commitment of traders report, silver speculative short positions grew 12% from April 5th to April 12th, but yet, silver prices have gone up over $7 an ounce since April 5th.

It's common knowledge that silver has been outperforming gold in recent weeks and months. Silver will continue to outperform gold in coming days. As pointed out in my earlier articles, I think silver is setting itself up to take out a $50/ounce target sooner than some of us expected. I would not be surprised if silver tops $50 an ounce before the end of this week.

Please use caution before opening any new long position in precious metals before Wednesday, April 27th. On Wednesday, Federal Reserve will convene a meeting. Any clarity on a QE3 or specifics on changes to QE2 could bring volatility for precious metal prices. If Ben Bernanke sticks to his gun and continues with QE2 without any concerns about inflation, that might skyrocket silver prices. If dollar weakness rattles the Fed enough to consider squeezing money out of the market, this could put downward pressure on silver prices. In my opinion, longs in precious metals have nothing to worry about in the foreseeable future.

If you believe in the gold and silver story, you can take advantage of the climb in gold prices by getting long exposure to GLD (iShares Gold Trust) or UGL (ProShares Ultra Gold). You can also benefit by getting short exposure to GLL (ProShares UltraShort Gold). You can take advantage of the climb in silver prices by getting long exposure to SLV (iShares Silver Trust) or AGQ (ProShares Ultra Silver). You can also benefit by getting short exposure to ZSL (ProShares UltraShort Silver).


Disclosure: I am long SLV.