By Melissa Pistilli – Exclusive to Silver Investing News

Like many of you, watching the price of silver nose-dive over the last few weeks has left me wondering if we are witnessing the end of the commodities boom, as oil, gold and silver prices square off.

Just when I thought silver could not possibly go any lower, imagine my chagrin this morning to see silver sliding under the bar at $15.39/oz. Silver has dropped to its lowest point in six months as the dollar rallied again. Yesterday, European Central Bank President Jean-Claude Trichet announced that the region will most likely experience a slowdown in the economic growth in the second half of this year. The dollar rose against the euro as the announcement fueled speculation that the ECB will not be raising interest rates in 2008.

Some analysts like Robin Wilkin of JP Morgan Chase & Co see the situation going from bad to worse in the near future. “It is hard to see gold not moving down to $800-$770 and silver towards $14,” said Wilkin.

According to Ira Epstein, most commodity prices are “well under their end-of-May settlement prices.” In his latest report, Epstein lists a series of events as responsible for wiping out the gains made since spring including the dollar’s rise, a sense in the markets that the euro had “topped out”, possible forthcoming changes in the way index and hedge funds can trade on the futures markets, and a $28 break in oil prices.

Now, all this may seem a bit disconcerting for the silver market, but only, says Epstein, if you are ignoring the “long-term picture” and focusing solely on the past 60 days (which seems to be “the focus of the Press and their articles on ‘demand destruction’).” Although we may have seen oil prices fall nearly $30, this in Epstein’s view is not “deflationary.” He believes there is a lot less downside left than most think. He reminds us that crude oil is holding steady at $120, which is nearly 4 times its price in January 2004. “My point is this,” says Epstein, “when prices rally, and especially when they rally to all times highs, sharp corrections from those highs is the norm.”

The sudden and quick-moving drop in silver prices definitely seems worrisome, but such actions are typical for downside correction and “prices often overshoot whatever the ‘downside target’ may be.”  If you are paying attention to the long-term picture and are knowledgeable about silver historical seasonal charts, you will realize that the current price break is all part and parcel of silver’s summer doldrums before prices gain strength in December. “Historically speaking,” assures Epstein, “silver is following the seasonal chart very well.”

Silver is experiencing its usual August secondary bottom, and this is the point at which bargain hunters begin to take advantage of the metal’s low prices before the upswing in fall and the Christmas rally. This time last year, silver also sold down strongly before rebounding in the fall. “Just as last year,” according to Resources Investor’s Gene Arensberg, “silver has broken through technical support levels, tripping sell stops, crashing through long trailing stops and forcing technically minded traders to sell or take defensive action.” 

In his special report, “August Silver Swoon Again”, Arensberg presents several comparisons between silver price actions in 2007 and in 2008, in order to make a very convincing argument for ignoring those market commentators who ” have heralded ‘the end of the commodities boom’,” just as they did last year.

On August 16, 2007, “silver selling pressure had reached a first stage panic selling crescendo” with prices dropping 10.3 per cent from the previous day’s close of $12.33/oz.  “The mood for silver then was about as grim as it gets,” similar to the situation today. Fortunately, the low turned out to be an interim bottom and next week, silver had stayed above $11.60. Arensberg says he would not be surprised “to see a similar selling crescendo at the bottom this year.”

During this crescendo last year, silver futures heavy hitter COMEX Commericals recognized the interim bottom and began covering or offsetting 41.9 per cent of its net short silver future positions over the following fortnight. Look out for COMEX Commercials to be strongly covering its net short positions soon this year. According to Arensberg, it will be a sign that silver is close to its bottom. Two other indicators similar to last year “are the continued buying pressure in the U.S. silver exchange traded fund and consistently very high premiums for physical silver in the popular silver market”, says Arenberg.   

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