Silver Market Volatility
(Bloomberg) — Silver has seen quite a tumultuous day, swinging between losses and gains, with a notable drop of nearly 10% before experiencing a sharp recovery. This erratic behavior is largely attributed to a lack of liquidity, causing significant fluctuations as the market struggles to stabilize.
By late afternoon in New York on Friday, spot silver had risen nearly 10%, reaching close to $78 an ounce, after dipping earlier to around $64. This comes on the heels of a hefty 20% decrease in the previous session, effectively negating all the gains made during last month’s impressive rally. Gold also experienced a rise following an earlier setback.
Silver tends to fluctuate more dramatically than gold, given its smaller market size and reduced liquidity. The recent volatility, notable for its magnitude and rapid pace, is intensified by speculative trading and thin over-the-counter transactions. Since peaking on January 29, the value of silver has decreased by more than a third.
“When volatility increases, market makers tend to widen spreads and reduce balance sheet usage, which makes liquidity more elusive just when it is most needed,” noted Ole Hansen, commodity strategy head at Saxo Bank AS. He added that until some order returns, “volatility risks eating away at itself.”
A multi-year bull market in precious metals picked up momentum last month, driven by rising geopolitical tensions, concerns about the Federal Reserve’s autonomy, and speculative buying from China.
Throughout January, investors amassed significant positions in precious metals, utilizing leveraged exchange-traded products and call options. However, this rally abruptly halted over the weekend, with silver recording its largest single-day decline on January 30, while gold had its steepest drop since 2013. Since that turmoil, the market has been extremely volatile.
A recent drop in Chinese purchases has left silver struggling for support. Domestic prices now stand cheaper than international standards, which, combined with the current turbulent market, has made potential buyers hesitant. Open interest on the Shanghai Futures Exchange has plummeted to its lowest level in four years, signaling an unwinding of positions.
“Long positions are being liquidated, while shorts are locking in profits,” remarked Jiji Wu, an analyst at Jinrui Futures. He also noted that many investors prefer to keep their stock holdings light ahead of the upcoming week-long Lunar New Year holiday, commencing February 16.
In contrast, the more liquid gold market seems to be faring better than silver. Some banks and asset managers have reaffirmed their long-term bullish outlook for gold this week. A fund manager from Fidelity International, who sold prior to the recent market shake-up, has expressed interest in re-entering the market, while the head of commodity portfolio management at Pacific Investment Management remains optimistic about gold’s continued rise.
However, the heightened volatility in precious metals raises questions about their effectiveness as risk hedges. Interestingly, JPMorgan Chase & Co. strategists have suggested that, contrary to traditional views on Wall Street, Bitcoin may be more appealing than gold in the long run.
As of 4:51 p.m. in New York, spot silver had increased by 9.9%, settling at $77.97 an ounce, while gold climbed by 3.8% to $4,960.58. Both platinum and palladium saw slight gains as well. The Bloomberg Dollar Spot Index, which tracks the U.S. currency, fell by 0.4% following two days of increases.
