The price of silver fell 12% in the last two trading days of last week. Gold lost 2.6%.
While gold has held up relatively well, silver fell in line with the broader stock market after President Trump announced reciprocal tariffs against nations that impose a tax on goods from the United States.
Gold bullion was exempted; coins, rounds, and bars of gold, silver, platinum, and palladium will not be subject to the tariff. This news provided some of the impetus for a sharp sell-off in the futures markets.
Long-term speculators who made leveraged bets that tariffs would drive up metal prices found themselves having gambled and lost.
The big sell-off highlights a frustrating reality about investing in bullion. In the short term, metal prices are largely affected by organizations with which bullion investors have virtually nothing in common.
Short-term price movements are driven by money flows in leveraged futures markets.
In the futures market:
*Investors tend to have a short-term mindset. The longest and highest-volume contract expires in a few months.
*Futures contracts are leveraged more than 10 to 1. This often results in weak hands. Investors who don't have the resources or guts to hold out when a bet goes wrong will sell.
*The motivations are completely different. No one buys a futures contract because they care about what they will leave to their grandchildren. In fact, most trades are not even carried out by humans; they are often carried out by algorithms or machines.
*Speculators in the futures market play a zero-sum game. One side bets on higher prices and the other on lower prices.
*The playing field is not level. There are smaller fish, with shallow pockets and no tricks or tools at their disposal. They are often paired with whales: banks with deep pockets, lots of extra tools, and, unfortunately, a history of dirty tricks.
*The futures market has rules that are subject to change without notice. These changes often occur during times of intense trading activity. For example, the COMEX increased margin requirements amid last week's sell-off. This move left even more investors with long positions in a reverse position, thus increasing the pressure to sell.
*The supply of contracts is virtually unlimited. The Hunt brothers may have been the last to be turned away when trying to buy a silver contract, and that was in 1980. Since then, bullion banks have been able to absorb any demand with a contract for anyone who wants to buy.
In the retail bullion market:
*Investors tend to buy with the intention of holding their investments for the long term. Almost all market participants are individual investors motivated by the instinct to preserve their wealth and reduce counterparty risk.
*There is no leverage.
*There is no counterparty when an investor buys coins, coins, and bars, especially a bullion bank with a criminal record.
*There is a real supply limit. Bullion markets are limited to available metal.
For those frustrated by the short-term action of metal prices, here are some further readings. Futures markets were created, in part, to discourage physical ownership of gold and silver.
Suffice it to say that if the price discovery of gold and silver were done in physical markets, rather than futures markets, price action would be different.
Last week was a clear example. Very few physical metal holders saw the news about tariffs and decided it was time to sell.
Rather, bullion investors saw the price decline as an opportunity to buy.
Friday was the busiest buying day in a couple of years. And the number of sellers declined significantly.
Clint Siegner, Money Metals