Exodus from silver set to take prices below $30/oz

Silver's rout this month after its bullish run this year could take the metal to three-month lows below $30 an ounce, as speculators, shaken by its 30 per cent plunge of the last two weeks, rush for the exits.

A wave of hot money from funds fuelled a rally that saw the price nearly double in the space of four months, overwhelming fundamentals in an illiquid market, touching a record near $50 an ounce last month.

"Silver is looking more and more like a bubble," said Saxo Bank senior manager Ole Hansen.

Spot prices fell another seven per cent so far on Thursday after a nine per cent drop in the last session, extending losses after their largest weekly fall on record last week.

"Many have been trapped over the last week on the bounce. $30 cannot be ruled out, and to the extreme $25, which would be the 50 percent correction," Hansen added.

Investors have sold the metal heavily after exchange operators in Shanghai and New York increased the amount of money they require to trade silver futures. The Shanghai Gold Exchange's announcement of another hike in margin requirements on Thursday helped push prices below $33 an ounce for the first time since February.

Analysts said the metal has found good chart support around current lows, but remains vulnerable. Silver's fall was long predicted by precious metals traders, who said its rally to a record $49.51 an ounce on April 28 was unjustified by fundamentals. As a small and relatively illiquid market, silver tends to be more volatile than gold.

Analysts said its strong price performance attracted more speculators to the market, who were easily scared off when the metal's correction first started gathering steam.

"The price increase we have seen over the last few months has been exaggerated by speculative interest, and the shaky hands now need to be pushed out of the market," said Commerzbank analyst Daniel Briesemann.

With some less committed investors still present in the market, prices have further to fall, he predicted.

Investors have also been pulling out of the world's largest silver-backed exchange-traded fund, New York's iShares Silver Trust. The trust's holdings have dropped by more than 480 tonnes since the beginning of May, already approaching its biggest monthly outflow ever of 495 tonnes, recorded in January.

The popularity of the silver ETF, which added nearly 1,500 tonnes of metal to its holdings last year, was a key factor pushing prices towards $50 an ounce. A return of significant quantities of that metal to the market could hit prices hard.

"Investor interest in silver has declined dramatically since the start of the correction, epitomised by the large ETF outflows," said Anne-Laure Tremblay, an analyst at BNP Paribas.

"So far we haven't seen any outflows of this magnitude in gold ETFs. This may be linked to the different risk/reward profiles of gold and silver. Silver is often considered as a geared play on gold, so it would be logical to see more pronounced shifts in investor sentiment."

Traders were also spooked in recent weeks by silver's increasing expensiveness compared to gold. The gold:silver ratio - the number of silver ounces needed to buy an ounce of gold - fell to its lowest in nearly 30 years near 31 as the grey metal rose towards $50 an ounce, but has since rebounded to around 44.

"It is in much more comfortable territory now," said Mitsubishi precious metals analyst Matthew Turner.

But while silver is expected to correct further in the short term, in the longer run it remains supported by the same factors that took both gold and silver to record highs this year - concerns over the outlook for the dollar, the low interest rate environment, and the impact of the euro zone debt crisis.

Demand for the metal from industrial users, chiefly electronics manufacturers, is also likely to put a floor in prices, though it is unclear where this will be.

And overall, silver investors are still in the black this year, albeit to a lesser extent than in previous years. Spot prices are up nearly seven per cent so far in 2011, meaning the metal is still comfortably outperforming gold, platinum and palladium.