Caroline Ritchie: Every market crash has a silver lining

Shiny, bouncy and attractive, silver has gone from investment darling to ditch-dweller in a week. Hammered down 35 per cent in a matter of days, traders watched with incredulity as recent gains evaporated overnight and they found themselves back at $34 per ounce. Silver and gold bugs, those investors so named because of their feverish bullishness towards precious metals, are the first to point the finger for this mini-crash on market manipulation.
The silver market - famous for its relatively thin trade, big swinging players and heavily rumoured institutional interference - is back to its unpredictable ways. Even if we accept that a few larger players push this metal around and leave the rest of us to follow in their wake, the speed at which silver shot up and then retreated is a valuable reminder that anything can, and does, happen out there.
A contributing factor to this monster drop was the CME, (Chicago Mercantile Exchange), increasing margins considerably for leveraged trades on silver. This led to a wave of margin-call related and pre-programmed selling, which was exacerbated by rumours that George Soros, (he of major high-profile speculative fame), was bailing out of gold and silver. Silver, for a brief moment and on a technicality, lost its reliable, inflation-hedging, haven status.
Of course, commentators now trumpet from lofty balconies, the silver market was massively overheated in the past few months, and margin increases were necessary to curb the price and cool the heals of a potentially gigantic bubble. There is some truth to this. A massive destabilisation in any of the major commodities could trigger adverse effects on the whole market. Lessons learnt from the housing bubble going pop in America.
In the meantime, let's strip away the purely speculative factors that push the silver price around and get back to the facts. Silver is still a critical industrial commodity necessary for technological growth in the established and emerging economies. So once again, it's back to the fundamentals, everyone, after the fire and fury dies down.
Caroline Ritchie is an NZX Adviser for Forsyth Barr in Napier and holds an NZX Diploma, BCom and BSc. For sharemarket advice contact her on (06) 835 3111 or caroline.ritchie@forbar.co.nz.
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