Silver a Warning Sign for Everyone?

The price action in silver since late January has been dramatic to say the least. The derivatives marketplace CME Group raising margin requirements has been seen by many as the reason for the 20 percent correction in prices since the precious metal hit a record over $49 an ounce on April 28th.

Silver bar and coins
Thomas Northcut | Photodisc | Getty Images
Silver bar and coins

Regular readers will remember that the currency team at Bank of New York Mellon have been drawing a number of comparisons between 2011 and 2008. The key comparison for Simon Derrick has been the commodities market which in 2008 acted as a lead indictor for stocks and the financial crisis in the autumn of that year.

“One of the most significant signals to emerge in early 2008 was a marked reversal in the price of a number of basic foodstuffs well beforeoil pricespeaked in July 2008,” Derrick wrote in a research note on Thursday.

“Notably, wheat futures staged a sharp reversal from the high seen in February of that year. By the time that the oil price and dollar changed course in mid July the price of wheat was down over 30 percent,” he added.

Gold and silver stalling in March 2008, well before the oil price collapsed that summer, coincided with the collapse of Bear Stearns.

“Although they didn’t start to actually collapse until the summer months, this change in behavior provided a useful early warning sign that attitudes were changing,” said Derrick

“Why does this matter now? The simple answer is that while history certainly never repeats itself exactly, similar circumstances often provide distinct echoes of past events.”

So the price action in Silverhas Derrick nervous.

“Adding to the sense that something of note has just happened was the report in the WSJ that a number of major investors have turned heavy sellers after having built long positions over the past two years. Although rather more modest, gold has also seen something of a reversal this week,” said Derrick

“We are certainly not arguing that 2011 is a carbon copy of 2008. Nevertheless, it is apparent that a similar set of warning signals are starting to emerge from a variety of different markets,” he added.