Silver's 19% Slump Spooks Commodity Traders

By Tatyana Shumsky 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--Sharp declines in silver prices spooked markets Wednesday, leading to selling across the commodities sector as funds reduced their exposure to hard assets.

Managed funds investing in resources often hold a wide variety of commodities, leading to board-based selling as they exit those markets.

"When they're long one commodity they're long other commodities, and if they have a margin call they tend to sell a percentage of all their holdings," said George Gero, vice president with RBC Capital Markets Global Futures.

Silver for May delivery -- the front-month contract -- settled down $3.193, or 7.5%, at $39.383 per troy ounce on the Comex division of the New York Mercantile Exchange. The contract is down 18.9% from Friday's settlement of $48.584, a 31-year high.

The most actively traded silver contract, for July delivery, settled at a four-week low, down $3.197, or 7.5%, at $39.388 per troy ounce. The contract is 19% off Friday's settlement of $48.599, a record for the most-active contract.

Silver's declines were echoed across the resource board as markets from cocoa to copper tumbled alongside silver. Arabica coffee futures, which had been trading near 14-year highs, plummeted in the across-the-board sell-off of soft commodities. By 1:40 p.m. EDT, coffee for July delivery had shed 3.9% on the day, trading at $2.9430 a pound. Cotton futures, which had been one of the market's best performers, plunged 3.8% for July delivery, hitting $1.5151 in intraday trade.

"There's a bit of commodity nervousness out there and talk of large hedge funds liquidating positions is keeping buyers to the sidelines 'til they see some price stability," said Sterling Smith, analyst with Country Hedging.

Silver prices initially cascaded 12% in electronic trading late Sunday, as investors in Asia scrambled to avoid higher trading costs.

CME Group Inc., which owns Nymex, has raised margin requirements on silver futures 38% in nine days, including a Monday afternoon hike that came into force at the close of business Tuesday.

"It's a continuation of the higher margins squeezing traders out," said Rob Kurzatkowski, senior commodities analyst at OptionsXpress.

However, silver's reputation as a volatile and thinly traded metal has likely deterred a wider effect on the commodity markets.

"The huge pullback in silver hasn't had the big impact on other commodities that it could've had, because some traders are still very shy of allocating too much of their portfolio to it," said Kurzatkowski.

Meanwhile, new entrants to the silver market weren't dissuaded by a third day of declines, though much of the fresh interest came from traders looking to bet on lower prices or hedge against positions in the option market. Open interest, or the number of open futures positions, ticked up 1% at the end of trading Tuesday.

"We're seeing new shorts enter the market and we're seeing general selling," said RBC's Gero.

Silver is considered gold's cheaper cousin, with investors often opting to invest in it as a less expensive way of guarding their portfolios against inflation and currency volatility. However, silver's recent slide has left many buyers apprehensive about the precious-metals sector as a whole.

Gold for May delivery, the front-month contract, settled down $25.20, or 1.6%, at $1,514.90 per troy ounce.

The most actively traded gold contract, for June delivery, ended $25.10 lower, or 1.6%, at $1,515.30 per troy ounce.

A weaker dollar, which tumbled alongside the precious metals, did little to stem the losses. Typically, demand for dollar-denominated gold appears less expensive to investors using foreign currencies when the greenback softens.

However, some traders are worried the greenback is oversold and a "steep and sudden" correction in the dollar will reduce commodity prices, said Smith.

The ICE Dollar Index, which tracks the dollar versus a trade-weighted basket of foreign currencies, was recently at 72.975, down from 72.957 late Tuesday in New York.

 
Settlements (ranges include open-outcry and electronic trading): 
London PM Gold Fix: $1,541.00; previous PM $1,540.25 
Jun gold $1,515.30, down $25.10; Range $1,505.50-$1,543.50 
Jul silver $39.388, down $3.197 cents; Range $38.940-$42.325 
Jul platinum $1,826.30, down $34.20; Range $1,816.70-$1,851.00 
Jun palladium $746.70, down $35.70; Range $741.60-$769.00 
(Source: http://online.wsj.com/article/BT-CO-20110504-715480.html)