And It Wasn’t Even Against the Law

Someone made a helluva lot of money this week. But most silver speculators, however, received a rather disturbing phone call from their brokers, that in turn reinforced the sell-off in silver, forcing the devils gold to take the biggest drop in more than 30 years. This is the kind of volatility that makes money – big money.

At this stage no one can be sure what is causing the sell-off, though there seems to be consensus that commodities as an asset class had got ahead of itself.

Gavan Nolan

Investors shifted quickly focus this week amid a sharp, and not quite explainable,  sell-off in commodities. Silver, in particular, made a spectacular decline. The price of the second most precious metal dropped by more than 25% during the week – the biggest correction for more than 30 years.

But a correction had to come at some point. The silver price has nearly doubled since the beginning of the year.

A series of margins calls by exchanges have no doubt contributed to the precipitous decline, credit analyst Gavan Nolan at Markit points out in his weekly summary.

But silver is not the only commodity to suffer falls.

Oil, which has also risen sharply over the last year, has been in free fall since Tuesday. Industrial metals such as copper, as well as soft commodities like corn and cotton, also saw large declines.

Were there fundamental reasons for the correction? Economic data, on the whole, has been disappointing this week. Leading indicators for the service sector, particularly the Markit PMIs and the ISM survey, suggested that the recovery in losing momentum in the US and in the UK, Gavan Nolan writes.

Disappointing factory orders from Germany, the driving force of the European economy, added to the unease.

And then there is the US labour market. The swift recovery in job creation that many had hoped for has failed to materialise, with a weak ADP private sector survey and another downbeat initial jobless claims figure depressing sentiment ahead of the non-farm payrolls report friday, Nolan adds.
Whether the economic data alone rationalizes such a major sell-off is open to question, according to Markit Financial Information.

The realisation that interest rates are being hiked across the developing world could have spooked investors. Monetary policy shifts in the developed world will also have an impact on risk appetite. The current round of quantitative easing in the US is expected to end in June (though the Fed balance sheet will stay roughly constant). Many suspect that the liquidity provided by central banks has driven up the price of risky assets. A normalisation of policy could bring an end to the bull-run in commodities. At this stage no one can be sure what is causing the sell-off, though there seems to be consensus that commodities as an asset class had got ahead of itself, Nolan writes.

The reaction in the credit markets to the commodity volatility, however, was relatively sanguine.

Equity indices took a tumble through the week but the main credit indices were fairly resilient.

The Markit iTraxx Europe index was only about 0.25bp wider than last Thursday’s close (post NFP bounce), while the eurostoxx and FTSE 100 were still well down over the week.

Sovereigns helped credit outperform on Wednesday after the EU/IMF bailout of Portugal was announced.

However, these gains were quickly given back during the latter part of the week; talk of Greece restructuring its debt is still hanging in the air, Nolan concludes.


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2 responses to “And It Wasn’t Even Against the Law

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