By Debbie Carlson
(Kitco News) - The parabolic move in silver is making a lot of veteran traders nervous that an already notoriously volatile market could get even more unstable as the gray metal races toward $50 an ounce.

While no one is calling a “top” to the market, sharp swings, like Monday’s $4 an ounce move in the May silver futures on the Comex division of the New York Mercantile Exchange, are not for the faint of heart.

May Comex silver settled at $47.149 an ounce, having reached as high as $49.82 and as low as $45.6450 on extraordinarily heavy volume. According to futures traders, volume in May silver was about 199,000 contracts whereas gold volume was 109,000 contracts. It’s a rare event when silver volume outpaces gold.

Since the beginning of this year, front-month silver futures prices have gained about 62%, outpacing nearly every other commodity market. In April alone prices have risen about 32%.

Gains like that make veteran traders nervous as healthy markets don’t go up in a straight line, and that’s what silver’s done. Many analysts are calling the move in silver “parabolic” and concerned about how steep and swift a correction could be.

That’s not to say the overall fundamental picture has changed. The concerns over fiat currency and hopes of industrial growth continue to underpin the market. However, because silver has risen so far, so fast without a pause several analysts are discouraging stepping into the market without having a long-term motivation to do so.

“If you’re looking to put some savings into gold and silver, don’t worry about the price. If you’re doing it to speculate where the price will be next month, I wouldn’t do it,” said Adrian Day, chairman and chief executive officer of Adrian Day Asset Management.

Several futures traders said for now they are steering any inexperienced clients away from silver because of the immense volatility and even some veteran traders said they are not willing to make any bearish bets directly in silver because of the volatility.

Day said silver’s sharp rise is a culmination of many factors. A key element, he said, was that people who were skeptical of the rally sat on the sidelines until now, realizing that the price break they were hoping to buy never materialized. He also said silver normally outperforms gold in bull markets, and people who couldn’t afford to buy gold were buying silver instead.

He said several of his clients are now asking about silver, but he said he’s not buying it now because of it going parabolic. “You never know when this is going to end. I would be very cautious to buy at this point,” he said.

He added, though, his view is different than someone who has just started precious metals investing because he’s been invested for a while. “When you’ve owned it at lower prices, you don’t need to go buy gold or silver,” he said, adding that’s where the motivation to buy it enters into an investor’s mindset.

Peter Thomas, director of business development at PFG Precious Metals, who works with clients in the physical side of precious metals investing, said he’s had a lot of new investors call and one of the big questions they ask if they’ve missed the move. “We are honest with them (and if they are still interested) we put them in our standard model of 5% to 10% of their portfolio. We tell them not to buy numismatics. We tell them get fresh bullion from an internationally recognized mint. Canada is good, the U.S. Mint is good. Australia is good,” Thomas said.

Thomas, who remembers the last time silver hit $50, said he’s received referrals from “the series 7 guys” – or brokers who mostly deal in buying stocks and bonds – to help their clients invest in precious metals, something that’s never happened. “We get them because they’re concerned about their clients being sucked into a South Florida bucket shop,” he said.

He also said that demand for physical silver is unrelenting, noting that Monday he got in 60,000 pieces of silver that is already pretty well spoken for.

On the other hand, he said, now that prices for silver are near $50 – and gold is at $1,500 an ounce – he is seeing some redemptions of both by long-time metal investors. Both of those levels were cited many times in the press as upside targets for the two metals. But those redemptions are just starting to happen, he said.

“We are buying back some silver from clients we have who bought at $12 and they’re doing back flips they’re so happy,” Thomas said.

The violent volatility in the futures market and the beginning of some metal redemption might be a sign to some investors that perhaps a short-term top is in the market. There are ways to make a bet on lower prices.

“If you are thinking of stepping in front of that freight train, options can help limit the risk,” said John Person, president of NationalFutures.com.

Person said he would not do anything specific in silver options because it’s a smaller market, but he said the gold options could be a way to play the short side.

One example he gave was to buy May $1,450 gold puts and hold them for a week. He said if gold did not see a correction in that time frame “you can get out without much premium decay.”

A trade like that would be profitable if the dollar saw a bounce after the outcome of the Federal Open Market Committee meeting Wednesday.

For the more fearless trader, Person said seasonally silver prices have fallen been mid-May and late June. According to the Commodity Traders Almanac, a book he co-authored, out of the past 37 years, if a trader has sold silver on May 13 and held that position to June 24, it has worked 24 times, or a 64.9% success rate.

While volatility sometimes gets a bad rap, Person pointed out the activity in silver is desirable to a high stakes traders. “Well, it’s a high stakes market and high stake players like it. With a $4 move you could make $20,000 on a one lot. If you’re right, you can have a very good month,” he said.

Person said to keep an eye on silver for possible signs of a top in this parabolic market. That can happen when a market reaches a new high, pulls back, then goes to test the high for a second time.

It goes there, consolidates and you see a pause, the market chops around and that’s when people lose money. They buy the second test,” he said.

In a parabolic market, prices often will return to where they were before the rally took off, Day said. But he doesn’t see silver falling all the way back to $15 area because there is strong underlying support, which wasn’t seen in the dot-com era, as an example of a parabolic market. “My rule of thumb is a 50% retracement. I would look to buy silver at $35 for the really anxious investor. But I might not buy it for clients until $25 or $30,” he said.

By Debbie Carlson of Kitco News dcarlson@kitco.com
Courtesy: www.kitco.com

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