Speculators Drive Silver's Sharp Sell-Off
The same investors that turned silver red hot are now being blamed for its decline.
They are short-term traders who helped drive the nearly 30 percent parabolic price climb in silver futures in the past month, and analysts say they were behind its dramatic fall Sunday and Monday.
The sharpest slide occurred several hours before the U.S. announced the killing of Osama Bin Laden, with silver futures plunging more than 10% to just over $42 an ounce in the first few minutes of the electronic session Sunday night.
Silver prices are falling again this afternoon, trading below $44 an ounce in electronic trading, on news of further margin increases.
The CME Group has raised margins three times in a week, making it more expensive for traders to place speculative bets. The latest hike raises initial margins on speculative positions in silver future by another 12% as of close of business Tuesday, May 3.
"Recent buyers will be most impacted by margin increases," says RBC precious metals analyst George Gero. "New margin requirements make silver more expensive to trade now than gold per contract for the average firm."
One clearing firm, MF Global , has already sharply exceeded the CME's requirements, boosting margins by 75% last Friday.
CPM Group, a leading precious metals research firm, said all this activity is preceding an even more dramatic drop and it forecast the metal could fall to as low as $37 an ounce in the short term.
Warning signs of the sell-off came late last week. Some traders say technical selling ensued after silver futures failed to hit the all-time nominal high above $50 an ounce on Thursday.
Data released by the Commodities Futures Trading Commission on Friday showed traders scaled back their bullish bets in silver futures and options last week to the lowest level since early February.
At the same time, retail interest in the metal was at a speculative frenzy for most of April, but did not amount to strong buying.
The main silver ETF, iShares Silver Trust , traded more volume than the SPDR S&P 500 ETF on several occasions last week.
But while holdings in the SLV ETF climbed about 2% from April 1 to 25, SLV holdings declined late last week to end the month slight below where they started.
But another factor that may have had significant impact on the 25 percent jump in prices last month — and subsequent slide over the past two sessions — is the rollover of the May silver futures contracts.
July COMEX silver futures became the most active contract on Thursday.
During the rollover, traders who are short the May contract either have to roll their May positions forward, buy them back and walk away from the futures market, or buy physical metal and deliver it against their sale to the COMEX.
The recent run-up is all on paper transactions and not actual demand for the physical metal, according to some analysts.
CPM Group, a leading precious metals research firm, says "virtually all" of the open interest in the May contracts were rolled forward.
"Very little of the positions have been held into the May delivery period, which began Friday, and no metal has been delivered into COMEX depositories to meet the delivery requirements," CPM Group said in a market alert ahead of its monthly report.
CPM Group contends the a major factor in its forecast for silver prices to drop to $37 in the short term is the impact of the rollover "suggests that silver prices have been in a bubble-like spike over the past few weeks, and are extremely vulnerable to a sharp decline."
"I think $37 is aggressive," says silver trader Mihir Dange, co-founder of Arbitrage LLC. "But, are we capable of a washout? Absolutely.”