The Sky is Falling...

As it has been said, what goes up must come down…this past week silver experienced a free fall as the precious metal dropped from almost $48.50 to roughly $34 in one week – a drop of over 30%.  The silver market witnessed “parabolic downside turbulence”.  This dynamic happens when a sharp rise in a short period for no reason other than investors falling over each other to buy; is followed by a swift and sharp sell off as investors fall over each other to sell.

Much of the sell-off in silver was attributed to tougher margin requirements for speculative traders. The Comex exchange had raised trading margins on silver contracts for the third time in two weeks.  Comex said this week that the minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures will rise to $16,200 per contract at the close of business yesterday, from $14,513. A year ago, the margin was just $4,250. There was also news that one of the biggest silver bulls in the world, Eric Sprott of Sprott Asset Management, had started selling 35 million shares of Sprott Physical Silver Trust (PSLV), a silver-based ETF.

Back in the 1970’s the Hunt brothers of Texas tried to corner the market in silver. Back then, after futures rallied to a record $50.35 an ounce in January 1980, prices dropped 78 percent in four months and wasn’t until this past week that prices got even close to that level.

Overall, silver has gained more than 145% in the past year, and 20% in April alone.  Unlike gold, which is typically bought and held by large investors and central banks, silver is dominated by individual investors and hedge funds looking to capitalize on the hot play du jour.  It will be very interesting to see if silver follows the same path that it did after the peak in 1980.