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Metals Review on May 15th, 2011

The fallout in silver is nothing short of epic, and the potential for further downside not only exists but should be anticipated. On the way up silver lacked consistent large sellers and had significant physical buying demand. On the collapse an interesting dynamic should be in play. Leveraged speculators and futures investors are likely to bail hard and fast, and without physical demand the freefall could be to sub-$20. However physical demand should spike as long term players scoop value. The problem is that there was not enough time to establish the higher price levels as silver spiked over 30% in one month, making the current levels still relatively high to anyone accumulating physical silver prior to March. This means that ‘value buying’ is unlikely to occur until possibly the $28 level, and even there I do not believe it would hold during a freefall panic.

Gold presents a different story as a large amount of ownership is being used in a savings capacity, with physical holdings being used as an interest bearing physical asset as opposed to a leverage speculative play (not that there isn’t plenty of leveraged physical gold). This means it will be harder for a physical gold selling panic to take place, but that does not prevent a speculative sell in the futures. Right now gold is holding its ground waiting for silver’s freefall panic selling to stabilize. When a fundamental reason to sell gold, like the deflating of commodity prices, matches up with the timing of the continued price destruction of the silver market, there could be a perfect storm scenario for a panic exit in gold.

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Metals Review on May 15th, 2011