Slowing growth first in the West and then in China and the rising greenback have led to massive unwinding by speculators in commodities on Friday
Is the great commodity story that was going along smoothly finally petering out? If you go by today's developments, it really seems so. Copper was down by more than 7% and silver was down by 9%. Among the other commodities that were sharply down today were nickel, lead and zinc.
However, the fall in crude oil prices was muted and gold showed even more resilience. The yellow metal was down only by about 2%.
After a dream run, what caused the commodity crash? What are the global implications due to this trend-breaker?
Thanks to the moves announced by the Federal Reserve, the dollar is again looking more like a safe haven—the greenback is rising sharply again—and this commodity crash is only due to speculative unwinding. Speculators were neck-deep in copper and silver.
Despite being called the 'poor cousin' of gold, silver has been one of the sharpest movers over past year, thanks to the skyrocketing prices of the yellow metal.
Silver rose from just under Rs30,000/kg in August 2010—all the way to Rs73,000/kg by April 2011.
A big crash followed in May, when the metal fell by as much as 30%. But in the first place, there was no justifiable reason for silver to shoot up the amount that it actually did—this was one rally purely fuelled by speculation.
Analysts are not sure if the Fed will inject more dollars into the system. Now where can silver go from here? If the dollar keeps going up and if Ben Bernanke does not come up with another liquidity-injection scheme, the metal will lose strength.
On top of these events, the CME Group also hiked its margin requirements on gold, silver and copper futures on Friday. The CME is attempting to curtail speculation in these commodities—gold margins will be raised by 21%, silver margins by 16%, and copper margins by 18%. These changes will come into effect at the close of trading on Monday (26th September), CME said after close of trade on Friday.
Copper, called a metal with PhD in economics, because higher demand directly translates into robust economic activity, was going along at a rapid pace—despite the overall slowdown—because it was assumed that the Chinese economy would not slow down. Chinese warehouses are overflowing with copper.
So the market went along with the assumption that China would just gobble up more copper every time the metal weakened.
China's economic growth has fallen. This was a signal to speculators that copper demand would fall, since the last source of big demand is now questionable.
And the metal with the PhD is now sending out a clear warning—a soft patch for the global economy and a further (possible) fall in markets.
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