(Kitco News) - Analysts are describing weakness in silver futures so far Monday as long liquidation that has removed some of the recent speculative froth from the market, encouraged in large part by two silver margin hikes by CME Group last week.
The decline was accelerated by sell stops, which are pre-placed orders triggered when certain chart points are hit. Some note the swift decline occurred prior to news about the death of Osama bin Laden, the longtime leader of al Qaeda, although this subsequently added to the bearish tone of the metal.
At 10 a.m. EDT, July silver futures were $2.599 lower at $46 per ounce on the Comex division of the New York Mercantile Exchange. They bottomed overnight at $42.20, which at the time represented a decline of 13% from Friday's close.
Several metals analysts said liquidation was encouraged by recent margin hikes by CME Group. The most recent went into effect after the close of business Friday. The exchange hiked not only margins for silver but also cocoa, coffee and ethanol, but lowered margins for a number of other products, citing "a normal review of market volatility to ensure adequate collateral coverage."
Previously, there was a "huge speculative excess" building in the silver market, particularly from smaller traders, said Mike Zarembski, senior commodities analyst with optionsXpress. "With the CME raising margin requirements…this market has become very pricy to hold positions," Zarembski said.
This forced a "lot of weak longs" out of the market as sell stops were triggered when the market fell through the 20- and 10-day moving averages, said Charles Nedoss, senior market strategist with Olympus Futures. So-called "weak" positions are those that are not in the money by far, with traders often choosing to exit quickly rather than put up additional money via margin calls when the market moves against them.
There had been a high level of leveraged positions in the silver market, said George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures.
Analysts pointed out that the decline fell at the start of electronic trading on a day when many overseas markets were closed, including London.
"Obviously, it was done in the midst of relatively thin trading conditions," said Dave Meger, director of metals trading with Vision Financial Markets. "It was stop-loss, panic-type selling…done in a relatively short period of time."
A New York trader pointed out that the market hit its low roughly half an hour after the electronic session began Sunday night. "It took very little time to go from $48 to $42.50," he said. "This market has been extremely crazy recently and extremely volatile, and it remains that way."
The recent volatility in silver no doubt encouraged some traders to sell and thereby book profits on bullish positions, analysts said. July silver last Monday got as high as $49.84 an ounce, fell back to $45.67 Tuesday, rose to $49.56 Thursday and then fell back as far as $42.20 overnight.
"If you're a trader and you've been long in this market and have a nice profit, and you see these wild price swings, you really have to lighten up," Zarembski said.
Zarembsksi noted silver's sell-off occurred before the official announcement of bin Laden's death. "It wasn't the cause of the sell-off, but it added a little bit more fuel to the fire," he said.
Silver Back Above 20-Day Average; Traders Eye 10-Day Average
Despite silver's tumble, analysts were not ready to declare an end to the bull run in this or the other precious metals. Zarembski suggested some market participants may opt to move from silver back to gold, which has posted a slower, steadier climb than the steep run-up in silver and typically has less volatility.
Nedoss noted that silver fell through the 20-day moving average, which lies roughly $43 an ounce. But the market quickly bounced back above this average again.
"I think you ran through a lot of stops and ran down there quickly," he said. "But you didn't stay down there long."
Should silver close back above $45.73, this could be "huge" for the market technically, since it would be right back above the 10-day moving average, Nedoss said.
Technically, silver needs to poke above $50 to maintain the momentum that had been occurring before the recent back-and-forth volatility, Zarembski said.
"Unless the market can get momentum traders to add to their positions, there are going to be some wild swings as weak longs are taken out of the market," he said. "We need to see a fresh high to get people excited about getting long, especially at these levels."
Zarembski said "until proven otherwise," silver's fall is a "correction" rather than a complete reversal of trend. "As long gold keeps moving higher, you're going to see silver follow along," he said.
By Allen Sykora of Kitco News; email@example.com