Silver Selloff Resumes as Volatility Remains Elevated

After a staggering rally of nearly 150% last year, the price of silver has hit a particularly rough patch amid elevated market volatility that started last week. On Thursday alone, the price plunged nearly 20%. The rout started during early trading in the Asian markets and continued when U.S. markets opened.

The turmoil that is being witnessed in this precious metal’s market was last seen in 1980. Currently, silver is trading at about $71 an ounce after climbing to an all-time high of $121 recorded last week.

The unprecedented climb seen in the price of silver and gold last year was fueled by geopolitical turmoil, concerns about the independence of the U.S. Fed, a cloudy economic outlook for the U.S. amid rising deficit financing, and speculative buying that happened in China on a large scale. As last week ended, that speculation-driven rally came to an end as a massive correction got underway.

This current selloff is largely driven by speculation and the metal’s price action has now become detached from the fundamentals underpinning silver’s market. This reality is evidenced in the fact that the market remains structurally constrained on the supply side, which would ordinarily support further price gains. However, prices are dropping like a brick because speculative selling has become a self-fulfilling loop that continues to drive the price of the metal downwards.

Compared to gold, the market for silver has always been more vulnerable to high volatility because the market is a lot smaller than the market for gold. Consequently, any factor that shocks the market is bound to have an outsized effect on prices, as the current situation illustrates.

The current volatility has caused a reduction in the credit limits allocated to traders of precious metals. As credit limits shrink, trading activity has declined and this has, in turn, increased volatility within the market. Ross Norman, CEO of Metals Daily, says this high volatility has caused industrial users, jewelers and investors to shy away from the market because the current conditions are akin to a casino rather than a normally functioning marketplace.

Traders will now be watching to see whether the price drops below $70 over the coming days and weeks in order to ascertain if the sustained rally of the metal has now come to an end or prices resume their upward climb to continue silver’s gains. For companies like New Pacific Metals Corp. that focus on silver, the stakes couldn’t be any higher. This is because metal prices determine how much interest investors exhibit towards firms on the exploration and production sides of the industry.

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