Gold and silver futures got off to another rocky start to begin the trading week. Silver fell as low as $20.84 a troy ounce, the lowest since September 2010, later rebounding to close 3 per cent higher at $22.91 in New York trading.
The price of silver was the standout mover in financial markets Monday as it took a hammering for the second trading session in a row, even as stocks remained relatively solid amid hopes over the U.S. economy. Silver’s stumble also brought down the price of gold; the yellow metal hit a one-month low of $1,338.10 an ounce and extended its slump for an eighth straight day. Gold has fallen more than 7% in May.
Traders attributed silver‘s opening decline to large sell orders by investors who needed to raise cash to cover losing bets on the yen, which had risen earlier in the day. “We feel silver weakness has been a liquidation trade as investors grow increasingly wary of precious metals and traders are forced to close positions to meet margin calls elsewhere,” said Stan Shamu, strategist at trading firm IG Markets.
The Japanese yen’s rebound against the U.S. dollar was featured Monday. Much of the rebound is likely short covering after the yen’s major descent the past several months. Japan’s economy minister said Monday the downside price action in the yen is about completed. There is a Bank of Japan monetary policy meeting Tuesday and Wednesday that will be closely watched by the market place. However, the BOJ is not expected to make any major policy changes.
Money managers are pointing to factors that are likely to hasten the fall in silver prices. Industrial demand is contracting at the same time that demand from investors is waning. And even with prices down 25% this year, miners have little incentive to ratchet back output, analysts said. That is why investors are even more bearish on silver than gold.
“The reasons investors have wanted to hold silver over the past few years have been taken out one by one,” said Ananthan Thangavel, managing director of Lakshmi Capital, a commodity trading adviser in Beverly Hills, Calif.
But as silver continues to decline, the market is becoming more prone to swings, with the triggers often unclear, traders said. “Any time volatility picks up like this, you know that trading is being dominated by short-term traders. You kind of want to get out of the way,” Mr. Thangavel said. He is betting on silver prices to fall further. Stan Shamu is also not ruling out further downside for the precious metal, noting that he sees support at $20, a key psychological barrier for investors.
Hedge funds and money managers are also increasing their bearish bets against gold, according to data from the U.S. Commodity Futures Trading Commission. Gold futures saw 74,432 short positions as of May 14 – the largest short position since records began in June 2006 – compared with 67,374 a week earlier.
A combination of factors including strength in the greenback, absence of strong inflationary pressures and robust performance of global equity markets has lessened the appeal for the precious metal in recent weeks.
Gold, which suffered its biggest one-day fall in three decades on April 15, is still searching for a base said Gilman of CEF Holdings, which is becoming more difficult in the face of dollar strength. A stronger U.S. dollar is negative for gold because it makes it expensive for holders of other currencies.