Is silver at “unrealistic” levels?

Lingering selling pressure persisted in silver overnight and the white metal sank very near to the $45 per ounce bid quote as the US dollar rebounded from fresh lows ahead of today’s Fed meeting and Bernanke press conference. Apprehensions that the recent, eight-session-long rally in metals may have been overdone, and nervousness surrounding the possibility that the Fed may indeed indicate that it plans to take away the party platter from which commodity space speculators have been feasting for a couple of years now contributed to Wednesday morning’s early patterns of volatility and indecision in the precious metals complex.

Spot gold dealings started the midweek session with a modest, $1.70 per ounce gain, quoted at $1,508.80 on the bid-side and, while still maintaining above the round psychological figure, the metal was being held back from further advances by players keeping a wary eye on the greenback (up 0.27 or .036% on the index at 73.78) and on any pre-Fed market posturing. In the interim, we had US durable goods orders coming in at better-than-anticipated levels for the month of March.

The 2.5% surge in DGO underscores US economic vigor and could provide another catalyst for a shift in Fed monetary policy. However, one might wish to wait for US GDP figures due later in the week before concluding that the “all-clear” signal should be given to the US central bank. Projections are that Q1 US GDP might show a slightly lower than 2% rate of growth, as opposed to the more than 3% expansion level that was recorded at the end of last year.

Silver fell by 33 cents on the open and was quoted at $45.27 per ounce. Overnight highs in the white metal were noted $1 above that level but the market’s temperature has shown a noticeable decline from its torrid readings seen on Monday. Yesterday, one veteran market observer, William O’Neill, a principal with Logic Advisors remarked that as far as silver’s 10% drop was concerned “the market was getting close to $50, and that's just an accident waiting to happen.” Tuesday’s action may have been a fender-bender, at this point.

“The speculative element has driven this market to prices that are just unrealistic" said Mr. O’Neill. The name of that “element” you likely know already: hedge funds. Average daily trading volume in April for silver futures contracts has witnessed more than triple its levels recorded in 2010. Such impressive market statistics prompted another analyst, Michael Gross over at OptionSellers.com to note that “this has been a market of wild speculation.”

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