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Could silver be the subprime of the commodity complex?
Like cheap housing in the U.S. during the years leading up to 2007, silver recently went through an unprecedented boom. But as the mania fades, it’s starting to look like trailer trash.
In November 2008, silver was languishing at around $10 an ounce. Prices had halved since the start of the year. But infusions of central bank liquidity and fiscal stimulus as governments and central banks sought to put a halt to the global credit crunch floated all boats, not least silver.
By the end of 2009, silver had recouped all of the previous year’s losses.
The metal then moved largely sideways until Federal Reserve Chairman Ben Bernanke’s speech in the summer of 2010, when he hinted at another round of quantitative easing to ensure the U.S. economy’s nascent recovery became well entrenched.
Commodities across the board started to race away. But where most merely saw double digit gains, silver went parabolic. By the end of April, prices broke above $48 an ounce and looked to test $50. An investment mania was well and truly in place, fuelled by momentum trades and by the Fed’s zero interest rate policy.
And then something caused investors to get cold feet. It could have been the CME’s decision to raise its silver margin requirements, or news that George Soros was selling the metal, or just that the market ran out of greater fools, but silver started tanking. It has dropped more than 25% in the space of a week.
In the context of global asset markets, silver is tiny. According to research commissioned by the City of London, total global stocks of silver were worth around $11 billion in 2008, with the average daily volume of physical silver cleared at the London Bullion Market Association some $1.1 billion. The small size of the market goes some way to explaining why prices move so fast and so high once investors started to become interested in the metal.
But that doesn’t mean silver isn’t important. It could yet have systemic effects.
Remember back in the spring of 2007 when Mr. Bernanke said the problems of the U.S. subprime housing market were contained, in part because it was a relatively small part of the overall economy?
Depending on how leveraged the silver market is, silver’s fall could yet have systemic effects elsewhere in the commodity complex. But even if silver market margin calls prove to be modest, there is also the possibility it will cause some sober reflection among investors with large speculative positions in other commodities.
Copper, for instance, has also been falling, though not quite as dramatically. This is more worrying than silver because there is mounting evidence Chinese firms and individuals have been hoarding the metal not just for speculative purposes, but to gain access to certain sorts of debt financing. By some accounts, firms use import credits, which are easily available, to buy copper which they then pledge to banks as collateral for leveraged loans. The CDO-like nature of this debt piled upon debt has helped to fuel China’s frenzied property market and to keep investment growth running at unparalleled rates. But it has to end sometime.
A chain reaction among commodities, triggered by silver, could put a halt to this particular Ponzi scheme. If it does, it will have repercussions on global financial markets"”financial firms and investors have been big buyers of commodities as a hedge against possible hyperinflation.
Maybe silver is the new subprime.
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Any doubts that the silver price is being supressed should now have been removed. Silver is massively undervalued. It took fraud on a grand scale for the cme to lower prices. Anyone still want to claim this is a ‘conspiracy theory?’
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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