By Deepak Rangan
Silver has always been a volatile commodity since it is often referred to as “cheap gold”. It allows people to bet on an economy without shelling out big bucks.

 

The following is a reconstruction of what I believe happened in the case of Silver’s wild rise till April and its wilder fall in May this year.

 

January: Silver was trading around $30. Analysts and speculators were betting on silver attaining $50 for the year. Headlines all over the media were screaming for Silver attaining $50 for the year.

 

February: Longs in Silver started heading northward as a grim global economy made people to invest in Silver.

 

March: In early march, silver broke $35. Investors still had their eye on the $50 mark and money came pouring in

 

April: By late April, Silver reached close to $50. The metal had appreciated too fast in too less a time. Investors whose target was $50 started closing their longs, investors who saw the wild rise of the metal knew that wild rises often are followed by an even wilder fall. As prices fell down from just about $50, further investors bet that $50 would be a strong resistance. Panic set in as prices continued to fall and then a flood of selling frenzy gripped the market. Comex raised their margins by over 80% which further compounded the problem

 

When you enter a buy position, look at 2 factors:

 

-General consensus of what the price of the commodity will be at a given time. In the case of silver, price was expected to hit $50 later in the second half of the year. But the price went near $50 within 4 months! Exception – If the economy had become unacceptably worser, this could have been justified. But the economy, even though grim, was not “unacceptably worser” when compared to the beginning of the year.

 

- When the commodity attains a price level earlier than expected, be cautious, don’t open new positions and be ready to close existing positions. Caution should be used for commodities that are seen as investment. Silver was the best example. The above exception still applies.

 

Commodities like wheat, corns etc are also exceptions in the sense that they are used for consumption, but silver is an investment. An acute shortage of crops will justify any sharp price rise. But the rise in price of silver was purely due to speculation not supported by an “unacceptably worser” economy. As such, it fell when common sense crept in and investors realized what was happening.

 

The market sentiment about the world economy remains negative, so silver is still a good investment. But unless the world “crashes on your head” be wary of wild moves and be smarter of cashing in on it when it does occur.

 

In short, if the rate of change in the price of a commodity cannot be explained by any fundamental factors, be wary.

 

(The author is a Content Editor at Commodity Online and may be contacted at deepak@commodityonline.com)