Silver extends plunge, wiping out gains in volatile market

SINGAPORE – Silver continued to slide on Feb 6 after plunging as much as 20 per cent on Feb 5, as a lack of liquidity led to wild price swings in a market struggling to find a floor. 

Spot silver tumbled to as low as US$64 an ounce early on Feb 6. It has retreated more than 40 per cent from a record high of over US$116 per ounce on Jan 29 and wiped out all of its gains from a spectacular rally in January. Gold also dropped for a second day.

The white metal has always been subject to more violent price swings than gold, due to its smaller market size and relative lack of liquidity. But recent moves, the most volatile since 1980, have stood out for their scale and speed, amplified by speculative momentum and thinner over-the-counter trading.

“When volatility rises, market makers naturally widen spreads and reduce balance-sheet usage, leaving liquidity weakest precisely when it is needed most,” said Mr Ole Hansen, head of commodity strategy at Saxo Bank, in a note. Until a degree of order returns, “volatility risks feeding on itself”, he added. 

A multi-year bull run for precious metals accelerated in January, in a surge underpinned by heightened geopolitical risks, concerns about the Federal Reserve’s independence and speculative buying in China. 

Investors built up large positions in precious metals in January, piling into leveraged exchange-traded products and call options.

The rally came to an abrupt halt at the end of last week, with silver seeing its biggest ever daily drop on Jan 30 and gold plunging the most since 2013. Markets have been extremely volatile since then.

The more liquid market for gold has coped better than silver. Many banks and asset managers have reiterated bullish long-term outlooks for the yellow metal this week.

A Fidelity International fund manager who sold before the crash said he was ready to buy again, while Deutsche Bank still expects gold to get to US$6,000 an ounce. BLOOMBERG