Silver biggest loser so far in precious metals and markets sell-off

Silver has been showing its huge volatility as the biggest faller in percentage terms in the past two days' market collapse, but is still hugely above where it was only a year ago.

Author: Lawrence Williams
Posted: Friday , 23 Sep 2011

LONDON -

No-one will be unaware that markets around the world have been collapsing as the weight of Eurozone financial turmoil and the realisation that global economic growth remains stalled has taken hold within the financial community. With Asian markets diving again overnight we could be in for yet another day of doom and gloom on the world's stock exchanges although there are early signs that the European stock indices may be stabilising this morning..

What has taken some observers by surprise, though, is that precious metals have come back sharply too when some might consider that the world's financial woes should mean that gold in particular would surge on safe haven demand - but what has happened is that the safety net this time - and so far - has been in the US dollar which has risen sharply against the Euro and the pound. Dollar up, gold down - a not uncommon correlation, but one that does not always hold in times of financial stress.

The big losers though have been the ‘industrial' precious metals, silver and palladium in particular, and this mirrors the global financial collapse of 2008. If the same pattern follows as in that year, from which markets in general had not fully recovered, then commodities could lead the plunge again although the logical justification of this is sometimes hard to understand. But remember 2008. Commodities in particular were horrendously oversold and those who bought at the bottom were able to make huge profits. Can this happen all over again?

Silver has been the largest sufferer of all with the price falling at one time all the way back to below $34.50. Indeed the metal has had a rough year after a heady first quarter which saw it approach the $50 level. Not for nothing is silver known as ‘the devil's metal' in some financial circles.

The problem for silver is that it has lost most of its direct monetary connotations and the fundamentals are just not as clear as that for most other commodities. There has been a strong investment demand, but much of this has been on the back of gold with the two often moving in parallel. Much of the real bullish sentiment on silver has been predicated on the fact that a huge amount of silver is traded, enormously in excess of actual supply and the silver bulls' dream is that the big trading banks, which they see as manipulating the price of the metal, get caught in a huge short squeeze through investors demanding physical delivery of metal that doesn't really exist!

At the moment the silver bears and short sellers seem to be in the ascendancy and we could see further sharp falls - particularly if weakness in the gold price continues.

However, if one looks at silver mining stocks it is also worth noting that, as with gold, the price even at its now much reduced levels, is still hugely (over 60%) above where it was a year ago - indeed it is still around 15% higher than it was at the beginning of the current year!

So what now for the metal? It remains vulnerable in a continuing general stock market sell-off, but its volatility suggests that if sentiment regarding the general economy improves it could also be the biggest beneficiary of any upturn. With the likely implementation of QE3 in some form in the U.S. fears of a real economic downturn may be relatively limited and while the U.S. economy may not see much, if any, real growth, the downside may also be mitigated and industrial usage for silver, with new uses coming to the fore may remain at reasonable levels.

There may well be offloading from the big silver ETFs as investors turn a little panicky which could have a short term effect on supplies, but one suspects Asian demand will remain strong, particularly as the Indian gift-giving season starts to really kick in as the Pitru Paksha mourning period - an inauspicious time for buying precious metals (see Online gold buying gets a boost in India during traditionally inauspicious period) draws to a close.

But with silver volatility remains the key. Any sustained recovery in the gold price will likely see an even bigger rise in silver in percentage terms, but it remains a risky sector to be in - not one for the ‘widows and orphans', but still one where fortunes could be made or huge further losses incurred. It is perhaps the true gamblers' precious metal.