Did Silver Trigger the Commodity Sell Off?

Silver prices dropped more than 25% in 1 week after receiving one hit after another as investors walked all over each other to exit their positions. What triggered this flight from commodities? Did it all start with Silver?


I believe Silver played an important role in the commodity sell off; after all, the risk play was ripe for a takedown. The CME would be the one that triggered this event by increasing its margins on silver, for the nth time. Here’s the quote from Bloomberg:

“The minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures will rise to $21,600 a contract after May 9, CME Group said on May 4. That was up from $11,745 two weeks ago.“

Obviously, not every retail investor out there can afford an 84% increase in cash which led to liquidation of the security. This pulled down gold, oil and commodities in general.

I have to say oil was primed for a takedown as prices were clearly unsustainable by a recovering world economy. I even mentioned how oil prices were unwarranted back on April 9. With silver falling off the cliff, investors suddenly realized the $30 risk premium no longer made sense as Libya is getting close to a solution. So what if unrest spread to Syria? it’s not a significant oil producer, who cares if the government shoots its own citizens.

What helped hasten the pace of the drop was the weak economic data reported for last month out of the US where unemployment claims surged and German manufacturing plunged casting shadow of doubt on the global economy. In every investor’s mind, the drop was warranted as every one could point his finger to this data.

Or this could all be Ben’s phone call to his buddies at Goldmann Sachs and company.

Ben: “Guys you’re killing me with the short dollar long commodity trade, give me some breathing space here”

Friends: “No problem Ben, consider it done”.

After all, do you really believe a bunch of small retail investors have the power to orchestrate massive moves like that with their puny leverage compared to the big banks?

Finally, the best part for oil is that prices will finally settle down on supply and demand fundamentals and I like that.

What do you think?