Silver speculators cause commodities to slide
The bull market in commodities has attracted much attention over the last few months, says Dr Prieur du Plessis, chairman of Plexus Asset Management. “This comes as no surprise, as commodities such as gold have been offering a very attractive alternative to the struggling stock market as a real store of value at a time when dollars and paper money seem doomed to fail.”
As gold continued to rise, silver started rising at an even more rapid pace. By 30 April 2011 silver had risen nearly 60% for the year to date.
“Enthusiastic investors bought silver in frenzy as it was more affordable and has industrial uses. Over the last year the iShares Silver Trust ETF (exchange-traded fund), which closely tracks the price of silver, has become ‘the most highly-traded security on the planet,’ according to Tom Lydon of ETF Trends,” says Du Plessis.
However, risky assets across the spectrum tumbled last week. “Stocks and high-yielding currencies came under intense selling pressure, with the largest moves taking place in commodity markets,” says Du Plessis.
“Crude oil was down almost 15%, gold down about 10% and silver down by a massive 27%, retreating to the $35 per ounce level and offering up much of its recent strong performance.” Various factors were to blame but, according to Du Plessis, the most obvious seems to be the effect of fleeting speculators.
“It started with silver when the ChicagoMercantileExchange(CME) increased speculative margin requirements on silver futures for the fifth time over the last month in attempts to tame suspected speculation. The most recent increase requirement of 13% came into effect from closing on Friday last week, triggering widespread profit taking on the commodity to ensue early this week,” says Du Plessis.
As the week went on, US economic data continued to disappoint with initial jobless claims up sharply to 474000, the private employment report coming in below expectations, consumer confidence down and disappointing service sector activity. “All these signs are indicative of a disappointingly slow recovery,” Du Plessis points out.
On Thursday last week theEuropean Central Bankalso softened its language on rate increases, leaving its benchmark interest rate unchanged and signalling that it would probably wait until July before it made another move. “The US dollar found additional strength in this, rising roughly 2,7% during the week and marking its largest five-day rally in 10 months,” says Du Plessis.
Generally a rise or fall in the value of the US dollar helps explain a large portion of the moves in commodity prices. As the dollar falls, commodity prices rise, and vice versa.
For example, Prof James Hamilton of Econobrowser noted that between September 2009 and September 2010 a 1% depreciation in the value of the US dollar was associated with a 1,3% gain in commodity prices for items like copper and oil.
The dollar rose 3,5% against the euro between Wednesday and Friday last week, while copper fell 4,5%. This is more or less in line with Hamilton’s findings. “Crude oil, however, fell nearly 15% last week, far outpacing the gains in the dollar,” says Du Plessis.
“Silver dropped nearly 30%, on pace for the second worst week in the commodity's history, while gold dropped less than 10%. The massive drop in silver clearly indicates what can happen when extreme enthusiasm comes to a screeching halt and, by the end of last week, both sliver and oil had broken below their prospective 50-day moving averages.”
Prior to last week’s events many investors believed commodity prices were starting to look a little frothy and were due for a pullback. “By the end of last week evidence of a speculator driven bubble was unmistakable,” says Du Plessis.
Despite last week’s broad-based sell-off in commodities, gold resumed its bullish trend earlier this week, advancing above $1500 an ounce. “Silver also recovered some lost ground as futures contracts traded back above $37 an ounce. Oil futures increased as well afterJP Morgan Chase & Co. raised its oil forecastfor Brent crude to $120 a barrel from $110 for 2011 on Monday,” says Du Plessis.
According to Du Plessis, there are a number of fundamentals still in play to support a continuation of the bull market in commodities in the long term. “The US is still struggling to come up with a practical solution to its multi-trillion dollar debt problem, which continues to weigh on the dollar.
“Furthermore, the demand for commodities from emerging markets remains relatively strong, but reserves in respect of many commodities are struggling to keep pace with this demand.”
Du Plessis warns that commodities markets will remain volatile. Investors should buy only on pull-backs and be sure they have a long-term investment horizon.
