Just as we finally began wondering when the commodity bubble would burst, some troubling signs in the precious metals market – namely silver and gold – are pointing to potentially big selloffs in other industrial metal and non-metal commodities. Reuters reported that silver suffered its biggest one-day drop in 29 months on Monday, down to $42.58 an ounce, and gold also slipped from its high perch. But yesterday, silver tumbled even further. The metal finished down $3.50, or 7.6 percent. That means it lost more than 12 percent over two days, according to the Wall Street Journal. Sell orders began spreading through the Asian market. ETF holdings of silver have also dropped almost 4 million ounces last week, Reuters said. Ultimately, could this isolated drop be a harbinger of a more commodity-wide tumble?
Let’s take silver first, for instance. The drop basically can be attributed to three things: inflation, interest rates, and by extension, the strength of the US dollar. The Wall Street Journal reported that George Soros’ investment firm, which has been buying up silver and gold over the past couple of years, has begun selling more quickly due to less concern over deflation – now that the threat seems minimized, those metals are not as valuable to hold. Most of the rest of the crowd buys as a hedge against inflation, which many, including Alan Fournier of Pennant Capital and Keith Anderson, who runs Soros’ firm, seem less afraid of these days. That’s mainly because the US Federal Reserve, they think, will imminently raise their interest rates, making the US dollar pricier and lessening the inflation threat.
Others are not so optimistic as far as the dollar’s concerned. “The U.S. dollar is significant in the price development of the precious metals,” said Quantitative Commodity Research analyst Peter Fertig to Reuters. “With the divergence of monetary policy in the U.S. and the euro zone in particular, I expect the dollar is going to weaken further in the medium term,” he said.
Rhiannon Hoyle, writing in another Journal piece, says that the sell-off has been “largely attributed to a hike in trading deposit requirements, or margins, by CME Group Inc, which operates the New York Mercantile Exchange and took action on speculative trade precisely because of the volatility.” Essentially, it’s costing a lot of money in collateral (at least $16,200) to trade silver futures contracts; just one contract runs $212,880, according to the WSJ.
From this, Hoyle also brings up a very important point: the trading of silver is not acting upon the fundamentals. Hoyle writes that there is a surplus of silver, and that speculative activity has singlehandedly accounted for the highest prices we’ve ever seen. With all the drivers out there – sovereign debt in Europe and political uncertainty in the Middle East, as just two examples – the implicit point could be that we haven’t looked beyond traders making bets on where world economies and their currencies will go.
For industrial silver buyers, of course, the lower prices could be a good thing (even though overall volume of silver usage cannot really compare with other industrial metals); however, the price drop may portend more trouble for those in other metal industries.
Copper, for example, has been suffering a bit as well, but for industrial demand and supply reasons rather than investment demand. China’s PMI has fallen overall in April, according to Reuters, even though the property sector index indicated growth for the seventh straight month. The copper price stood at $9194.75 per ton on Tuesday, its lowest since mid-March, and hit a seven-week low on Wednesday at $9,155 a ton.
Even oil has taken a hit. Light sweet crude futures (June delivery) settled down 2.2 percent, to $111.05 a barrel on the NYMEX, while Brent crude fell 2.1 percent to settle at $122.45 a barrel. Several analysts attributed this drop directly to the fall in silver. “When I saw silver just plummet toward the end of the day, I knew we were going to follow it,” said Raymond Carbone, president of oil brokerage Paramount Options, in a WSJ article. Peter Donovan, vice president at Vantage Trading in New York, agreed. “It’s almost like this silver [market] has turned into a little bit of an indicator for some guys,” he was quoted as saying.
Overall, big banks and analysts (UBS, Barclays, etc.) are generally either neutral or bullish on the precious metal sector, especially silver and gold, because the pressing macro issues like debt imbalances and civil strife are not going away anytime soon. Stepping back to look at the big picture, we also don’t expect overly huge corrections for silver for the rest of 2011 – as long as gold keeps rising.
By. Taras Berezowsky
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