Thursday, May 5, 2011

Silver sinks

The price of silver has plunged by more than 25% in just four trading sessions, as illustrated in this daily chart. Silver appears to be at the leading edge of the commodity price reversal that has blindsided many unlucky investors and speculators in the past week: gold is off by 5%, crude oil is down 13%, copper is down 6%, and gasoline is down 10%.

Those looking for an explanation for this point to signs that the U.S. economy is stumbling (e.g., the big jump in unemployment claims in recent weeks), since a weaker economy would reduce demand for commodities. I don't see convincing evidence of a material change in the economy's health (see my prior posts on claims and the ISM service sector), but the runup in commodity prices had all the looks of speculative excess (see my post on silver). We may discover what really triggered this commodity reversal in the fullness of time, but I doubt that it was any sudden change in the dynamics of the U.S. economy. Like the housing market, this could just be a speculative bubble that has burst.


Unknown said...

Since the biggest fear on the mkt now is inflation, a fall in CRB index should lower CPI expectations.

Benjamin Cole said...


Commodities have become speculative markets, there seems little doubt about that. Some say some reg changes requiring more capital per silver trading turned the tide.

I wonder how long the downhill ride?

OPEC and Russia have a huge stake in keeping the NYMEX price up.

Buyers of Treasuries say inflation is dead. Buyers of real estate say inflation is dead. Now, buyers of commodities?

Anonymous said...

In my opinion the market finally recognized that inflation is not a real issue by the moment.

The world is moving from a negative real interest enviroment towards a more normal situation.

TradingStrategyLetter - Weekly Summary said...

It is all in the mind boggling 86% increase in CME margin requirements in a few days.

I am very suspicious about the 'regulators' velocity and panic to 'supress' precious metals prices.

With US$72b in 'fresh' new quarterly financing requirements it smells like the Fed trying to burst an inflation indicator bubble to me!

Metals will move from weak to strong hands.

Scott Grannis said...

Re: inflation expectations. There has been a small but hardly impressive drop in expected inflation (10 bps) as imbedded in TIPS prices in the past week. That argues for this being the bursting of a speculative bubble rather than anything fundamental.

TradingStrategyLetter - Weekly Summary said...

When does the Fed debt bubble burst?

Public Library said...

Rapid margin requirement hikes are definitely suspicious considering the President is building a task force to evaluate 'speculators'...

Stone Glasgow said...

"Investigating speculators" shouldn't be reasonably feared today. In all likelihood, the new regulations will simply help to consolidate clearing firms, increasing profits for the big firms with more political influence, and raising transaction costs for traders.

This should lower liquidity slightly and create bigger price swings, justifying more regulation and eventually there may be one clearing firm for commodity speculation.

Unknown said...

Another headwind for future corporate earnings is PPI/CPI spread in favor of the first one.
My guess is that hard commodities level is more important for PPI than CPI.(and vice versa wit soft ones).
That works with lag of course.