By Melissa Pistilli – Exclusive to Silver Investing News

Several forces are colluding  right now to depress the silver price. Major reasons cited for the downturn are the dollar’s rise, the crude oil price tumble, and rebounds in the US equities market, which have made precious metals less attractive as a hedge against inflation.

On Friday, the dollar experienced its biggest single-day increase against the euro in six years. The Canadian dollar, on the other hand, is in the midst of its “longest losing streak” in more than three years, falling for the eighth-consecutive day to 93.52 cents. The Canadian stock markets took a dive on Monday, responding to the pressure placed on commodity prices by the dollar’s rally and subsiding inflation worries. The S&P/TSX Composite index fell 138.55 points to 13,203.19, the Venture exchange dropped 3.6 per cent to its lowest close since November 2005 and the S&P/TSX mining and minerals index dropped 5 per cent.

The crude oil market continues to force silver and gold prices down. Although the military conflict between Georgia and Russia has heightened supply disruption concerns, the market is still focused on the slowdown in global oil demand. Monday brought reports that oil imports to China, the world’s second-largest oil importer, fell 7 per cent in July, the biggest drop since December 2007.

Michael Aronstein, Chief Investment Strategist at Oscar Gruss & Son Inc., says the commodity boom is fading. “I think it is over in terms of the investment hypothesis, at least for the next several years. I think the demand destruction, both in the developed world and the developing world, is going to be quite a bit greater than what people assume.”

But others do not seem to agree. Sixty-five year-old Investor Jim Rogers, who in April 2006 correctly predicted that oil price would reach $100, and gold, $1000, says the fundamentals for commodities are “astoundingly” good, and the bull market “has a long way to go.” Julian Phillips of GoldForescaster.com feels ”the factors pushing the price down are not … substantive enough” to alter the upward trend in precious metal prices. “Only a sound dollar, healthy global economic growth, low inflation and confidence in the world monetary system will change the trend, but then, this is the stuff dreams are made of.”

Gold and Silver Investments Ltd. Director Mark O’Byrne believes the dollar’s rally is probably just another dead-cat bounce, “given [that] the financial and economic news here has been as bad if not worse, than that from the euro zone.” The dollar may be gaining ground “not because the US economy is strong,” says Mineweb’s Lawrence Williams, “but because economies elsewhere are playing catch-up with the effects of the US-led financial crisis and credit crunch. It is probably not so much a case of a strong dollar, but a weak yen, euro and pound. It just depends from which angle you view the world economy.”

According to SilverSeek analyst Clive Maund, “The silver support level in the $16.00 – $16.50 area finally buckled on Friday in the face of the dollar spike leading to a rapid plunge that has taken the price below its 300-day moving average.” This has left silver wide open to the risk of a decline to the next support level in the $14 area, which is expected over the short-term. “At this level”, says Maund, “it will be viewed as a strong buy as this should mark the end of the downtrend.”

From a historical perspective, Maund’s assertion isn’t too hard to swallow. Jeff Rubin of Birinyi Associates has noted that although this is the greatest decline experienced in commodities prices between 1970 and today, it does not necessarily mean the end is near. The closest similar move, says Rubin, occurred in April 1974 when commodities plunged in the same manner.  That same year, commodities continued lower in the short term before returning to their previous highs in July.

David Beahm, Vice-president at Blanchard and Co., feels that although commodities and precious metals were sinking to the bottom, market fundamentals and investor demand would buoy prices back up to new highs. Analysts at Goldman Sachs have reinforced their belief that rising inflation threats and global economic uncertainty will “remain constructive” for precious metals.

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