Silver Hit With Fresh Selloff as Volatility Holds Near Highs
ManuelSummary:
The wild swings in precious metals have meant that banks have struggled to trade with investors, as holding long or short positions, even temporarily, becomes risky.
Silver fell sharply, wiping out its two-day recovery as the white metal struggled to find a floor following a historic market rout.
Spot silver plunged as much as 20% to below $71 an ounce on Thursday, with the rout starting during the Asian trading session.
After a record-breaking rally that appeared to run too hot, the metal has retreated by more than a third since touching an all-time high last week. Measures of historic volatility have surged, and the market hasn’t seen this much turmoil since 1980.
Precious metals soared over the past year in a surge underpinned by speculative momentum in China, geopolitical upheaval and concerns about the US central bank’s independence. The rally came to an abrupt halt at the end of last week, with silver seeing its biggest-ever daily drop on Friday and gold plunging the most since 2013.
Speculation, particularly in China, “is wreaking havoc on the price discovery process for bullion,” Metals Daily Chief Executive Officer Ross Norman wrote in a note Thursday. Volatility in precious metals has become self-sustaining, he said, removed from the real market and its drivers.
A wave of buying from Chinese speculators — from individual investors to large equity funds venturing into commodities — lifted metals from copper to silver to fresh records over the past month. A massive premium for the country’s only pure-play silver fund even prompted the issuer to send out near-daily risk warnings and halt subscriptions.
Investors elsewhere also built up large positions in precious metals throughout January, including through inflows into leveraged exchange-traded products and a wave of call-options buying. When prices fell during Asian trading hours on Friday, it triggered a cascade of selling that continued into the early part of this week, and prices have continued to be exceptionally volatile since then.
The sudden and sharp decline in precious metals also weighed on sentiment in base metals markets, with copper falling as much as 2% to slip below $13,000 a ton on Thursday. Meanwhile, spot gold dropped as much as 4.1% in choppy trading.
“Silver has entered a highly flow-driven phase, with price action dominated by speculative and CTA positioning rather than physical fundamentals,” said Daria Efanova and Viktoria Kuszak of Sucden Financial.
Despite ongoing structural tightness, silver’s high beta and strong macro linkage leave it vulnerable to sharp corrections at elevated prices, according to the Sucden analysts. “Volatility is likely to remain pronounced, with upside dependent on renewed inflows and downside limited but uneven, as positioning shifts continue to drive exaggerated moves,” they said.
Silver has always been more volatile than gold, owing to a smaller market size. Even then, recent swings stand out for their scale and speed, with price moves magnified by heavy speculative inflows and thinner trading in the over-the-counter market.
The wild swings in precious metals have meant that banks have struggled to trade with investors, as holding long or short positions, even temporarily, becomes risky.
Higher prices have also strained the credit limits allocated to precious metals trading desks, traders said. Thinner trading contributes to further volatility, and means activities in derivatives markets can have outsized impacts on prices.
The exceptional volatilty is damaging in the long term for precious metals, said Norman, a market veteran. As investors, jewelers and industrial users step away from a market that “feels more like a casino than a marketplace,” he said, “before long the bullion trading landscape looks utterly desolate like a moon-scape.”
What Bloomberg’s Strategists Say...
“Traders will be watching for this week’s nadir just above $71, but arguably more significant is the $70 mark. The precious metal hasn’t been in the $60s range since December and a return to that range will deepen the risk aversion mood across assets.”
Source: Bloomberg
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