Silver Market Volatility: Recent Trends and Predictions
(Bloomberg) — The silver market has experienced intense volatility, with prices swinging nearly 10% in a single day. This instability has left investors questioning the market’s stability as liquidity issues contribute to drastic fluctuations.
Price Fluctuations in Silver
By late afternoon on Friday in New York, spot silver prices rose by nearly 10%, reaching close to $78 an ounce after a brief tumble towards $64. This movement followed a staggering 20% drop in the previous session, effectively erasing all gains from last month’s impressive rally.
Historical Context of Silver’s Volatility
Silver has historically been more prone to sharp price swings compared to gold due to its smaller market and lower liquidity. However, the recent volatility has been particularly striking, characterized by rapid price changes not seen since 1980. These fluctuations have been exacerbated by speculative trading and thinner over-the-counter market activity, leading to a significant drop of over a third since the record high reached on January 29.
Market Dynamics and Expert Insights
“As volatility rises, market makers increase spreads and reduce balance-sheet usage, leading to diminished liquidity exactly when it’s needed,” noted Ole Hansen, head of commodity strategy at Saxo Bank. He warned that until stability returns, these volatilities could reinforce each other.
Investor Behavior and Market Trends
The recent bull run for precious metals was driven by geopolitical tensions, uncertainties regarding the Federal Reserve’s decision-making, and increased speculative buying, especially from China. However, this upward trend came to a halt when silver experienced its largest daily drop on January 30, followed by a similarly dramatic decline in gold prices.
Decline in Chinese Buying and Market Impact
A notable reduction in silver demand from China over the past week has hindered price support. Prices locally have turned into a discount compared to international benchmarks, and the heightened volatility is discouraging potential buyers. Current open interest on the Shanghai Futures Exchange has plummeted to a four-year low, indicating a trend of position closures.
Future Outlook for Precious Metals
Amid this chaotic environment, the more liquid gold market has shown some resilience. Many banks and asset managers have expressed long-term bullish perspectives on gold. A Fidelity International fund manager mentioned readiness to invest again, reaffirming confidence in gold’s upward trajectory despite the challenges faced by silver.
Conclusions: Investing in a Volatile Market
The high volatility in precious metals is raising concerns about their effectiveness as risk hedges. In a notable deviation from traditional views, strategists at JPMorgan Chase have argued that Bitcoin may present a more attractive long-term investment compared to gold.
As of 4:51 p.m. in New York, spot silver climbed to $77.97 an ounce, while gold rose to $4,960.58. Other metals like platinum and palladium also saw slight increases. The Bloomberg Dollar Spot Index, indicating fluctuations in the US dollar, dipped by 0.4% following two consecutive days of advancement.
