Silver’s volatile moves
The rally in commodities has been spectacular over the past few months. While uncertainty in the markets has grown, gold and silver appear to have defied the laws of gravity, making fresh highs every day. Silver was clearly the outperformer compared to its more expensive counterpart, gold, jumping to multi-decade highs.
Gold and silver have traditionally been considered a safe haven investment as they are commonly perceived to be a reliable store of value. Investors buy these precious metals in times of political, social or economic uncertainty.
Eurozone debt problems continue to be a catalyst for the rally. Greece’s debt crisis has deepened and to make matters worse there are rumors that the country may leave the Eurozone. Portugal has received a bailout from the European Union and speculators expect Spain to be the next country to seek financial help. In addition, worries over unsustainable fiscal deficits in the world’s largest economies have also hurt investors’ trust in the financial system.
Recent geopolitical events have led investors to seek for safe haven investments as confidence in paper money erodes. Fighting in Libya continues while concerns about oil supplies have intensified. Oil, in turn, has soared to record high levels, becoming more expensive and increasing the risk for global price instability.
The Federal Reserve’s loose monetary policy is another reason for gold and silver’s record high levels. The dollar has weakened significantly as a result of the US Federal Reserve pumping dollars into the economy. It has been falling gradually, losing its value and, in investors’ eyes, its sparkle. Fed President Ben Bernanke’s speech during his press conference has put more pressure on the greenback. He kept a slightly dovish tone and gave no indication of when the Fed will start tightening its monetary policy. Heightened risk aversion combined with the dollar losing its lustre resulted in increased demand for gold and silver.
On Monday 2 May, silver experienced sudden profit taking following the news that al-Qaeda leader Osama Bin Laden had been killed. When US President Barack Obama announced the news, geopolitical concerns momentarily eased and investors’ appetite for riskier assets increased. Confidence in the US economy increased helping the US dollar to strengthen and recover from a three-year low against a basket of currencies. Silver was the biggest loser, witnessing a massive unwinding of long positions. Weighed by a stronger dollar and a higher risk sentiment, silver shed 33.6% falling to 33.06 dollars an ounce from 49.78. Gold also dipped and shed 7.3% falling to 1462.05 dollars an ounce from 1576.38.
Further developments continue to add pressure on silver as the Chicago Mercantile Exchange (CME) group announced significantly higher margin requirements for silver trading, which encouraged further selling of the metal. In addition, George Soros’s hedge fund revealed that it was unwinding long gold and silver trades.
The big question on investors’ minds is will these recent developments continue to add selling pressure on precious metals? Or should investors prepare for another spectacular move? Whatever happens, it is certainly an exciting time to be trading the impressive moves of gold and silver.
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