LAST week was truly horrible for leveraged longs in commodity markets. Silver fared particularly badly with prices falling close to 30 per cent in five days. It was a vicious sell-off which will have left many traders and investors bruised, battered and wary of future volatility. Yet there is plenty of anecdotal evidence from dealers that demand for the physical remains as strong as ever, with premiums for coins and bars widening over the futures-related spot price.
Along with just about every other dollar-denominated financial asset, silver rallied sharply after Ben Bernanke delivered his speech at the Jackson Hole Economic Symposium at the end of last August. The Federal Reserve chairman announced that a second major round of quantitative easing was on its way and investors responded by selling the dollar and piling into dollar-denominated assets. But silver’s real price surge began this January when it rallied nearly 90 per cent over the next three months. Buying was spurred on by concerns about the US budget deficit, the Fed’s programme of asset purchases, the falling dollar, growing suspicions of short-side manipulation of the futures market and stories that there were shortages of the metal which could result in a default at COMEX if enough longs demanded physical delivery.
Recent price action saw silver rally sharply from $33.80 on 17 March to just below $50 per ounce five weeks later. Back on Friday, prices were back to these mid-March levels – a nasty sell-off to be sure, but perhaps more of a corrective retracement than a bursting bubble.
This week will be crucial in determining silver’s future direction. The series of margin hikes by CME Group (while contributing to the sell-off) now only serves to strengthen the hands of the more committed longs. But there is growing concern about a slowdown in global growth, and this is where silver’s dual role as an industrial and investment metal can be a curse as well as a blessing. On top of this, the imminent ending of the Fed’s programme of asset purchases (for now at least) could help lift the dollar and once again undermine commodity markets. But if silver prices can consolidate above the band of support between $33.80 and $34.20 (formed by a 50 per cent price retracement and the 100-day moving average), then the upward trend could soon be re-established.