Monday, May 2, 2011

Aftereffects Of Crash In Silver Pushes Down Gold

It was an odd start to trading at 6 PM ET. Right out of the gate, silver lost about 12% in an outright crash. There was speculation that the crash had to do with mainland China, even though markets there were closed for May Day, but the more plausible explanation came from the CME jacking up Comex margins. With thinly-margined players obliged to sell out, a selling cascade developed in a thin market with not much buying interest. It's a safe bet that a lot of that selling was margin selling. Anyone trading long on 10% margin, with no gains cushion, would have been wiped out in ten minutes. They would have been sold out.

The silver crash is a mute testimony to the dangers of trading futures, particularly at the top of a parabolic rise. A slump in the S&P 500 of 12% over an entire day, back in the days before circuit breakers, would have had the financial press up in arms. It would have been called a crash in page-1 headlines or the Internet equivalent. Yet, silver dropped that amount in eleven minutes on a Sunday evening. Add to that the fact that, despite brokers now requiring as much as 20% margin now, commodities can still be leveraged much more than stocks except for index futures. As Jim Rogers predicted, the end of silver's parabolic rise last week ended up very badly despite the respite last week. Lesson? If an asset bobs around after a parabolic run-up, it's giving you time to get out before something ugly happens.

The funny part of that crash is, gold actually went up while silver was crashing. In about the same timeframe, the metal made a new record of $1,578.20. It's as if the panic selling in silver had induced panic buying of gold, which is counterintuitive in two ways. First of all, gold and silver tend to move in tandem. Secondly, when one asset crashes there tends to be selling of others to try to meet margin calls. Gold was pulled down later, but its jump while silver crashed made for an unusual counterpoint. It's as if the silver crash was tied to the stagflation theme, or the kind of panic that makes traders rush into gold.

As later action showed, it was all for naught. Having made its new record, the metal dove to $1,550 and then bobbled down to the high 1540s. A recovery climb close to midnight ET got gold into an unusually wide trading range, between $1,550 and $1,560, once night had turned into morning. As of 8:25, the spot price was $1,551.40 for a drop of $14.30 since Friday's close. The Kitco Gold Index attributed -$15.40 to predominant selling and +$1.10 to a weakening greenback.

The U.S. Dollar Index also got a boost from the silver crash, which also proved to be ephemeral. After sagging from 73.0 to 72.9 before 6 PM, it jumped up to 73.15 before tumbling down to 72.80. Reversing at 8:50 PM, it then ran up to as high as 73.26 shortly before midnight. That run didn't last, although the slide-back was ragged. From 5:30 AM, the Index was floundering around 73.0 - where it was when trading resumed on Sunday afternoon. As of 8:33, it was still floundering at 73.01.

A Reuters report attributed gold's fall to the news that Osama bin Laden had been killed. Oil lost about two dollars a barrel on the news.
Markets across large parts of Asia and much of Europe were closed for May Day and Labour day holidays, reducing the number of market participants and making for volatile trade.

While gold initially fell more than $5 an ounce after news of bin Laden's death, traders expect its bull trend to remain intact given the macroeconomic and political environment.
Needless to say, silver got the press this morning. Holdings of the SPDR Gold Shares Trust were unchanged on Friday at 1,229.64 tonnes.

An earlier Bloomberg report said gold jumped to a record as silver crashed.
“We opened up this morning in New Zealand exceptionally well bid across the board,” Jonathan Barratt, managing director at Commodity Broking Services Pty, said in a phone interview from Sydney today. “We got a high in gold and then we got massive sell orders in the spot market and the price fell through. When futures opened the market fell again."
He was also quoted as saying that kind of move signals a reversal, but it'll take one to two weeks to see how it plays out.

With no news on the U.S. economy at 8:30, gold slumped to the lower end of its $1,550-$1,560 range after an initial blip-up when regular trading started. Subsequently, the metal dithered around $1,551,50. As of 8:45, the spot price was $1,552.10 for a drop of $13.60 since Friday's close. The Kitco Gold Index assigned -$14.10's worth of change to predominant buying and +$0.50's worth to greenback weakening. The U.S. Dollar Index managed to find enough traction to test 73.05, but slipped after being thwarted. As of 8:47, it was skidding at 73.01.

Despite gold's overboughtedness, it was silver that got hammered. Gold did fall in sympathy, but not after making a new record. Having found support at $1,550, the metal's now licking its wounds and seeing what'll happen next. Today's regular trading will determine whether gold will continue to break down or shrug last night's tumble off.

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