Silver saw a steep 10% plunge in today's trading, falling from
its perch in last week's trading, after failing to move above the
The news that
Osama bin Laden was killed overnight
helped to spur some gains in the USD, weakening oil and
commodities, and lowering the risk premium that has been
underpinning commodity prices.
Another important factor was the increase in
requirments for those trading silver.
Wall Street Journal
: "Exchange operator CME Group Inc. (
) raised margins for Comex silver futures for the second time
this week as silver prices soar amid much
The higher margins take effect at the close of trading Friday,
the exchange said. The CME revises its
requirements as a normal course of business, and has
previously raised bond requirements during times of high
to guard traders against additional risk. The operator owns
New York Mercantile Exchange, which trades silver on its Comex
For speculators in the benchmark 5,000-ounce silver futures
contract, the exchange is raising initial
requirements, or the deposit required to purchase a
contract, to $14,513 per contract, up from $12,825. Maintenance
requirements, or the additional capital needed to keep the
contract overnight, will increase to $10,750, from $9,500."
The combination of a reduction in risk premium plus the
increase in margins came together to cause a strong reaction in
the market. With silver rallying so strongly recently (170% over
the last 12 months), professional traders scaled back silver
exposure by 26% as of last Tuesday. That shows us that the recent
gains may have been too strong, and that silver takes a break
from its recent
even as gold surged higher to end last week.
The preference for gold over silver may be shifting.
: "Some traders put down silver's spectacular fall to an
unwinding of a short gold-silver ratio position, compounded by
automated stop-loss orders.
The gold-silver ratio, used to measure the number of silver
ounces needed to buy an ounce of gold, rebounded to about 35 from
below 32, its lowest level since the early 1980s."
The macroeconomic and political picture still favor previous
metals, as long as the Fed continues to send signals that it will
pursue a loose monetary policy, and that rates are not likely to
move until early 2012. That makes selling USD and buying
commodities a strong bet as metals and most other commodities
prices in USD climb as a result of a weaker USD.
-zone sovereign debt, US budget deficits and monetary policy, and
the war in Libya, are just several factors that have kept gold
and silver well bid in the past few months.
Today's session did see lower
and so these moves may have been exaggerated. Still, an
is seen when we get to market tops and bottoms, so this is
an important time to monitor how the battle between bulls and
bears plays out this week.
Some other rumors for the possible
in silver today, and recently.
: "The conspiracy theorists have had more than one theory.
The biggest is that a couple of the big US investment banks
had long held massive short positions in silver and were caught
out when the price started to move, creating in effect a short
that has forced them to try to cover their positions.
Another is that China has been buying precious metals to try
to diversify away from its exposure to US Treasuries, and yet
another that Chinese traders are replicating a strategy they
adopted with copper and using imports and stockpiles of silver as
a way of circumventing China's restrictions on credit as it
attempts to keep inflation under control. The traders can borrow
against their commodity holdings.
At a more prosaic level, apart from the exchange-traded funds,
there has been plenty of hedge fund and
activity generally in all the key commodities, which may
have helped fuel the price rise and which would unwind rapidly at
the first hint of the price cracking."
We have key events on the schedule this week including
interest rate decisions from the RBA, ECB, and BOE, as well as
the April Non-Farm Payroll report. The ECB decision and the NFP
especially will be important market movers, and will have a
direct impact on risk appetite for commodities.
Chief Market Analyst