Silver price whipsaws again as thin liquidity fuels wild swings

Silver lurched between losses and gains, dropping nearly 10% before snapping back, as a lack of liquidity led to wild swings in a market struggling to find a floor.

Spot silver was up more than 9% to above $77 an ounce by mid-afternoon in New York on Friday, having earlier tumbled toward $64. That followed a 20% decline in the previous session that wiped out all of the metal’s gains from a spectacular rally last month. Gold also advanced after an earlier retreat.

Silver has always been subject to more violent price swings than gold, due to its smaller market and lower liquidity. But recent moves, the most volatile since 1980, have stood out for their scale and speed, amplified by speculative momentum and thinner over-the-counter trading. The white metal has lost more than a third since hitting an all-time peak on Jan. 29.

“When volatility rises, market makers naturally widen spreads and reduce balance-sheet usage, leaving liquidity weakest precisely when it is needed most,” Ole Hansen, head of commodity strategy at Saxo Bank AS, said in a note. Until a degree of order returns, “volatility risks feeding on itself.”

A multiyear bull run for precious metals accelerated last month, in a surge underpinned by heightened geopolitical risks, concerns about the Federal Reserve’s independence and speculative buying in China.

Investors built up large positions in precious metals through January, piling into leveraged exchange-traded products and call options. That rally came to an abrupt halt at the end of last week, with silver seeing its biggest-ever daily drop on Jan. 30 and gold plunging the most since 2013. Markets have been extremely volatile since then.

A sharp reduction in Chinese buying over the past week means silver has struggled to find support. Prices in the country have flipped to a discount against international benchmarks, with violent market moves discouraging buyers. Open interest on the Shanghai Futures Exchange fell to the lowest in more than four years, showing that positions are being closed.

“Longs are stopping out and shorts are taking profits,” said Zijie Wu, an analyst at Jinrui Futures Co. Investors also tend to keep holdings light ahead of the week-long Lunar New Year break, he said. That holiday begins on Feb. 16.

The more liquid market for gold has coped better than silver. Many banks and asset managers have reiterated bullish long-term outlooks for the yellow metal this week. A Fidelity International fund manager who sold before the crash said he was ready to buy again, while the head of Pacific Investment Management Co.’s commodity portfolio management team said he thinks bullion’s upward trajectory remains intact.

Still, the high volatility in precious metals has also raised concerns over their ability to function effectively as a hedge against risk. In a break from Wall Street orthodoxy, JPMorgan Chase & Co. strategists said Bitcoin is looking much more attractive over the long term than gold.

Spot silver climbed 9.4% to $77.58 an ounce as of 1:40 p.m. in New York. Gold advanced 3.9% to $4,963.21. Platinum and palladium edged higher. The Bloomberg Dollar Spot Index, a gauge of the US currency, edged down 0.4% after a two-day advance.

(By Yihui Xie)