Life After The Silver Mania: Where Silver Prices Go From Here (SLV, SPY, AGQ, ZSL, SIL, USV, DBS, SIVR, PSLV, GLD, SLW)

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May 8, 2011 8:08pm NYSE:AGQ NYSE:SIL

Jack Barnes:  With the demise of the “silver mania” we’ve seen in the past week, I thought it was time to take a closer look at where silver prices will likely go from here.

I first recommended silver to Money Morning readers back in September — with silver trading at $19 and change – and along with that “Buy” call to readers I gave a $50 price target.

Back in mid-April, when we had our roundtable conversation on silver, this “other” precious metal had been trading in the $42 to $43-per-ounce range.

At the time of this “roundtable,” I felt strongly that silver would see the mid $30s before it traded into the mid $50s. It appears I was partially correct: Silver ran up to $50.22 in the spot market, hitting my first target of $50 per ounce – before dropping 35% in the next week.

That kind of price action is almost a textbook example of a silver mania.

Life After the Silver Mania

As of late yesterday (Thursday), silver was trading in the mid $30s, with the iShares Silver Trust (NYSE:SLV) having experienced more share volume than the SPDR S&P 500 ETF (NYSE:SPY) did in yesterday’s trading.

I wish I had good near-term news for the silver bulls, but I am now expecting silver to continue to grind lower, with expectations of seeing it in the upper $20s.

I have no idea where silver will finally bottom this time. But I can’t help but recall when crude oil ran up to $50 per barrel for the first time: Once it had a chance to reset, it returned to new highs significantly higher than its previous highs.

I believe that silver will act similarly – once the carnage of this blow-off top is in the history books.

It will take months to repair the damage done to the charts. But in the future, I expect to see silver trading at $75 per ounce – and without this crazy volatility.

It just might take a year or two to get there. However, if the U.S. Federal Reserve’s “QE3” is announced, you can expect that silver will be setting new highs before it is over.

When I recommended this precious metal back in September, I outlined a forecast for silver: Indeed, I wrote that “silver is trading at just under $20 an ounce right now. I think it could hit $50 an ounce by the 2012 presidential election, which would represent a 150% move from here.”

Silver Mania Scenarios

Since we achieved the $50 dollar target so quickly, it’s not a surprise to me that we’ve pulled back to the low $30s just as quickly. Let’s move the new projected high-water marker out to $75 per ounce before the next election in 2012. That gives it about 18 months to reach its target.

There’s also one other wildcard in the silver mania saga.

I’m talking about Greece.

In the latest development in the Eurozone debt crisis, reports circulated today (Friday) that Greece might pull out of the Eurozone bloc. Greece has denied this.

However, if Greece does leave the European euro block – or is kicked out – I would not be surprised if the $75-an-ounce target price that I’ve forecasted here is reached by Christmas.

You see, if the euro is shown to be nothing more than pieces of paper with pictures on it, investors will freak out.

In the last eight months, there have been at least 10 margin changes at the Chicago Mercantile Exchange (Nasdaq:CME) – and five of those have happened in the last 10 trading days. Since November, the level of leverage allowed to a speculator went from 28-to-1 per futures contract in maintenance margin levels in early November to 8-to-1 currently.

In the next few weeks, you want to watch the levels of silver available in the bonded warehouses, available for prompt delivery. If the amount of silver available for delivery continues to drop, things could get interesting again this summer. By “interesting,” I mean a steady climb back to the mid $40s to mid-$50s.

At this point in the curve, the “change” in available supply in the bonded warehouses is a better indicator of the future direction of silver than speculative interest. That is, a drop in available product in the bonded warehouses can drive the price of silver back up.

I will be focused on available supply: This could have been a giant “bear raid,” with no new deposits in the warehouses arriving behind it. If so, silver could stay volatile for a while.

Another Look at Silver Wheaton

Now, Money Morning Executive Editor Bill Patalon specifically asked me about Silver Wheaton Corp. (NYSE:SLW) – the topic of my “Buy, Sell or Hold” column back on Oct. 10 (a “Buy” that I reiterated during the roundtable discussion last month. For the original column, see the link in the “related stories” list that follows this essay).

The stock closed at $26.63 on the Friday before that article’s Monday morning publication. Silver Wheaton shares subsequently ran up as high as $47.60 – a nice run for those who heeded my “Buy” call.

The shares have since retrenched, and closed yesterday at $35.15. They were down 5% yesterday alone (though they remain well above my recommended price).

Given what’s occurred in the silver market over the past week, I am now waiting until I see Silver Wheaton’s earnings before I reiterate – or change – my call on this stock.

I would not be shocked if the company hedged some production. There was crazy volume lately – enough, in fact, to enable a commercial venture to sell into it.

I am going to listen to Silver Wheaton’s management during the company’s earnings call on Monday, and will report back to you shortly thereafter.

So make sure to tune into Money Morning early next week, when I promise to provide an update on the whole silver mania in general, and on Silver Wheaton specifically.

Related Tickers: Sprott Physical Silver Trust (NYSE:PSLV), ProShares Ultra Silver (NYSE:AGQ), ETFS Physical Silver Shares (NYSE:SIVR), PowerShares DB Silver (NYSE:DBS), ProShares UltraShort Silver (NYSE:ZSL), UBS E-TRACS CMCI Silver TR ETN (NYSE:USV), Global X Silver Miners ETF (NYSE:SIL), iShares Silver Trust (NYSE:SLV), SPDR Gold Trust (NYSE:GLD). 

Written by Jack Barnes From Money Morning

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