Related topics: commodities, gold, Federal Reserve, economy, investing strategy
Silver prices plunged this week as investors fretted that rising trading costs could cripple a market exhibiting signs of froth.
Silver's first three-day drop since 2008 came as some major investors have been selling. George Soros' big hedge fund, a company operated by high-profile investor John Burbank and some other leading commodity investors, have been selling gold and silver, according to people close to the matter, after furiously accumulating precious metals for much of the past two years.
The sell-off suggests that the sharp, nine-month run-up for precious metals could be entering more dangerous territory.
Many investors have turned to gold, silver and platinum as the U.S. dollar has weakened. Precious metals often serve as an alternative to paper currencies. The dollar is down 8% this year against a basket of other currencies.
Many smaller investors favor silver over gold, partly because of the former's much lower price per ounce.
Silver flirted with $50 an ounce before paring about 20% in its three-day slide this week. Yet silver remains up sharply in 2011. It rose 84% last year.
And some prominent investment pros continue to favor precious metals, among them hedge-fund manager John Paulson.
An exchange-traded fund that owns silver bullion -- iShares Silver Trust (SLV) -- was the most active ETF on the U.S. market some days last week, a sign of the rabid recent interest in silver.
"We haven't seen this much volatility in decades," said Robin Rodriguez, a metals trader in Charlottesville, Va. "We have such large profits built in," so some investors are taking their winnings, said Rodriguez. He remains bullish on the metal.
Interest in holding the silver ETF grew so intense it became hard to borrow shares to sell, as bearish traders need to do if they want to sell the metal short and bet on a decline.
All this helped set up the tumble, which started late Sunday, catching many by surprise. As sell orders flooded the market in Asia, brokers sought more collateral from investors who had bought on margin, even as they fielded calls from anxious investors who wanted to sell.
"Everybody wanted to get out," said Richard Digenan, an executive at R.J. O'Brien, a brokerage firm in Chicago.
For those who invest in silver via the futures market rather than an ETF, exchanges and brokers have been raising margin requirements, the amount of collateral investors must leave with their broker to back a position.
CME Group, a commodity-exchange operator, has raised margin requirements three times in a week.
Many investors in silver futures make heavy use of borrowed money. As prices fell, they faced either sending more collateral to their brokers or selling some contracts.
Exchanges tinker with margin requirements when market volatility is high. They worry about being exposed to losses themselves if a market moves too sharply and collateral proves insufficient.
Sudden caution by previous precious-metals bulls magnified investors' concerns.
Silver started dropping last week Thursday, then Friday when the volume started spiking in ZSL which has gone from 13 to 24 in 5 trading days. After that its was bye, gone see yea.
