Silver prices have moved drastically faster and higher in just a few trading sessions. To quote it, COMEX spot silver prices moved from a low of $24.84 per ounce on January 28 to highs around $30.03 per ounce on February 1, 2021. The price move of around 20 per cent happened in just three trading sessions. From the highs, the prices have significantly corrected to around $26.77 per ounce as on February 3.
The same volatility has been witnessed on MCX futures. From the lows of Rs 65,000 per kilogram on January 28, 2021 to highs of Rs 74,000 on February 1, and current price stands at Rs 68,425/kg, as on February 3.
Silver as an asset class has always been the speculators’ paradise, which is reflected in the price moves over the past few trading sessions. Has there been a change in the fundamentals or is it just the speculative mode of investors driving the metal’s prices? What really drove such crazy moves in this metal can be simplified as under.
Two classes of investors: rational vs irrational
There are two set of investors here: one who are the big hedge funds who have tonnes of cash at their disposal, and then there are the other set of investors, the retail investors, who are on the discussion forum Reddit, and have played the role of moving the GameStop Corp stock to skyhigh prices in just a matter of few sessions. (Reddit is a community of traders who discuss their trades, and make money).
There are discussions on the social media platforms about the role of investors who are there on the Reddit platform to have bought significantly in the silver futures as well as in the call options, while the hedge funds are supposed to have shorted the futures, leading to the frenzy in silver prices. The prices soared and the exchange had to intervene. They asked people dabbling with futures to start putting up more collateral in the form of increasing margins. CME Group Inc raised COMEX silver futures margins by 17.9 per cent to $16,500 per contract from $14,000 for February. The prices started correcting the next trading session onwards.
Is there a fundamental change in silver market?
There is no fundamental change in the supply and demand dynamics of the commodity; however, there has been a substantial fundamental change on how investors think of an asset class, whether it has to be rational or irrational behaviour. While efficient market hypotheses state that asset prices reflect all available information, the current frenzy movement in silver prices defies this.
The head of the US Securities and Exchange Commission, which regulates the markets, will meet with Treasury Security Janet Yellen, the heads of the Federal Reserve, and the Commodity Futures Trading Commission. Yellen has asked to discuss the recent volatility and whether the trade has been consistent with fair and efficient markets.
What next? Where are silver prices headed?
The era of high liquidity and low interest rates is here to stay for a fairly long period of time, and the liquidity will chase higher yields, which will lead investors to move towards silver as well as gold, which has performed well in the year gone by.
The current situation, where markets are uncertain and investors made to look for safe-havens, will lead to move price volatility in the silver market. Silver prices (CMP: Rs 68,400) are expected to head higher towards Rs 72,000 in a month.
(Prathamesh Mallya is AVP Research Non-Agri Commodities and Currencies, Angel Broking)