Silver Prices See Wild Swings as Low Liquidity Drives Volatility
Silver prices recently experienced a roller-coaster session, dropping nearly 10% before bouncing back. This “whipsaw” movement is largely due to a lack of liquidity, leaving the market struggling to find a stable price floor.
By mid-morning in New York on Friday, spot silver rose over 7% to approximately $76 an ounce. This recovery followed an earlier tumble toward $64. These swings come after a brutal 20% decline in the previous session, which erased all the gains from a massive rally last month. While silver fluctuated wildly, gold also managed to climb after an initial retreat.
Why Silver is More Volatile Than Gold
Silver has always been more prone to price swings than gold because its market is smaller and less liquid. However, the recent moves—the most volatile since 1980—have been remarkable for their speed and scale. This volatility has been made worse by speculative trading and thinner activity in over-the-counter markets. Since hitting an all-time peak on January 29, the metal has lost more than a third of its value.
Ole Hansen, head of commodity strategy at Saxo Bank AS, explained that when volatility rises, market makers often widen spreads and reduce trading activity. This leaves the market even less liquid just when investors need stability the most. Until order returns, this volatility is likely to continue feeding on itself.
The Rise and Fall of the Bull Run
The multiyear rally for precious metals picked up speed last month. This surge was fueled by global political risks, concerns over the Federal Reserve’s independence, and heavy buying from China.
Throughout January, investors piled into precious metals using leveraged products and options. However, the rally ended abruptly. On January 30, silver saw its largest daily drop ever, while gold suffered its biggest plunge since 2013. The markets have remained highly unstable since then.
Cooling Demand in China
A sharp drop in buying from China has made it difficult for silver to find support. Prices in China have actually fallen below international benchmarks as the violent market moves scare off buyers. Additionally, data from the Shanghai Futures Exchange shows that investors are closing their positions at the highest rate in four years.
Zijie Wu, an analyst at Jinrui Futures Co., noted that many investors are taking profits or exiting trades. Furthermore, traders typically reduce their holdings ahead of the week-long Lunar New Year holiday, which begins on February 16.
Gold Remains More Resilient
The gold market is more liquid than silver and has handled the recent stress much better. Many banks and asset managers remain positive about gold’s long-term outlook.
For example, a fund manager at Fidelity International who sold before the crash mentioned they are ready to buy again. Similarly, the commodity team at PIMCO believes gold’s long-term upward trend is still in place.
Is Gold Still a Safe Hedge?
The extreme volatility has sparked a debate about whether precious metals are still effective “hedges” against risk. Interestingly, some strategists at JPMorgan Chase & Co. have suggested that Bitcoin may look more attractive than gold as a long-term investment.
Market Snapshot (As of 10:48 a.m. in New York):
- Spot Silver: Up 7.6% to $76.32 an ounce
- Spot Gold: Up 3.5% to $4,944.77 an ounce
- Platinum & Palladium: Trending slightly higher
- US Dollar Index: Down 0.3%
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