Silver and Gold Ratio – A Drop Coming for One….(Also CME Increases Margin Requirements)

There are those times when you just have to try to look at something objectively. Of course that has nothing to do with investing in markets that move much further than anyone can predict when governments are pumping millions billions trillions of dollars into the system.

The byproduct of these actions has been the call for the demise of the dollar, super-inflation and a rush to precious metals. That actually makes sense, but how much is too much? A few days ago we floated the idea that a short position in Silver may be something to look at. In this week’s TDI podcast, we considered it again about it again. The basic premise is that there has been a parabolic move on the heels of a declining dollar. This week, with Bernanke about to take center stage, there may be some wide movements in the currency markets. That would conceivably have an effect on precious metal prices. So, here is some more commentary that we found that make sense. Even though silver has been a tremendous play over the past year, the last gasping move seemed overdone.

Even if you want to throw away all of the chart and theories, take a look at the fact that late in the day on Monday, the CME increased their margin requirements for Silver futures. That in itself should throw some cold water on the subject – at least for a few days.

4/25/11 – CME Margin Requirement Update (pdf)

Silver tonight:

One thing is clear: While silver may see some additional upside, it is a crowded trade and when investors start running for the exits, it may get ugly.

From Bloomberg:

April 21 (Bloomberg) — Silver, trading at a 31-year high, is set to decline as the metal is the most expensive relative to gold in almost three decades, said Taurus Funds Management Pty. The CHART OF THE DAY shows silver for immediate delivery plunged 58 percent in the first quarter of 1980 after climbing
to a record $49.45 an ounce on Jan. 18 that year. A month before that peak, the gold to silver ratio dropped to parity with the spot price of silver amid trading by Dallas-based Nelson and William Hunt, who were convicted in 1988 of conspiracy for attempting to manipulate prices. The ratio and the silver price crossed this month again for the first time in three decades.

“Despite price momentum and investment flows, it‘s very difficult to justify being long or even buying silver,” said Mohendra Moodley, a co-manager in Sydney of Taurus‘s precious-metals fund, in a phone interview on April 18. “It definitely exhibits signs of a metal that has run very hard, and it‘s more
likely to decline than rise.”

Silver, used for investment and in jewelry and electronics, rallied 48 percent this year, the most of 24 commodity futures tracked by the Standard & Poor‘s GSCI Index, and reached$45.9575 today, the highest level since 1980. An ounce of gold bought 32.98 ounces of silver, the least since 1983. Investment demand for silver climbed 40 percent to a record in 2010 and fabrication use jumped to a 10-year high, researcher GFMS Ltd. said in a report published by the Washington-based Silver Institute this month.

Taurus‘s $220 million precious-metal fund sold all its silver positions in equities and bullion in January, while staying with bets on gold- and platinum-group metals, co-manager Brenton Saunders told Bloomberg News on Jan. 21. The fund lost 1.1 percent in the first quarter, according to Taurus.