By Steve Fiscor, Editor-in-Chief
In a little more than a month the price of silver climbed to nearly $50/oz and then returned again to $35/oz. Throughout April, silver climbed steadily from $37.83/oz (April 1) to $48.48 (April 28). From the time the markets opened Sunday, May 1, until Friday, May 6, the price dropped $12.68/oz to $35.62/oz, a 27% drop. On a month-to-month basis, silver sustained a loss of a little more than $2/oz. Year-to-date, silver prices would be up $4.81/oz or more than 16%. Last year, silver was up 84%.
Silver prices above $30/oz, as far as silver miners are concerned, are a far cry from the end of the world. Day traders that bought into an exchange traded fund (ETF) for silver during the first week of May expecting sliver to climb to $150/oz had a rude welcome to precious metals markets. Since inception of precious metal ETFs, investors have not seen a significant sell-off until now.
The sell-off had more to do with profit-taking and the way metals are traded than supply-demand fundamentals. The business press quickly pointed to the George Soros hedge fund and others that sold large positions in silver. For those that invest in silver futures rather than ETFs, brokers raise the margin requirement (the collateral to back a position) during periods of high volatility. Investors had to give more to brokers in the form of margin requirements, which may have translated into selling some contracts.
For many, the steep drop brought back memories of the Hunt Brothers cornering the silver market in the late 1970s and 1980s. At its height, silver hit $50/oz on January 17, 1980. Those times were different though. Investors could not own gold, which is why they chose silver as hedge. They could not sell their position in Tokyo on Sunday evening from their iPhone in an airport before U.S. markets opened. But, when the Hunt Brothers could not meet a $135 million margin call, the market sustained an intraday trading drop of 50% on March 26, 1980 (Silver Thursday). The Hunts lost $1 billion.
For the first time in a long time, speculators were burned by over-heated precious metal prices. Some were angry. A “metals strategist” used this analogy to sum up the situation in The Wall St. Journal: “If gold is a Monte Carlo casino, silver is a slot machine in Las Vegas.” Trading and investing are two different worlds. If the world’s economy suddenly improves, ETF volatility could affect the mining business. That does not appear to be in the cards at this time.