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Silver Trade Showing Wilder Side

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"Silver's dramatic 12% tumble in just 11 minutes late Sunday night may have grabbed the headlines, but it doesn't tell the whole story."

The Wall Street Journal, Rhiannon Hoyle

Silver's dramatic 12% tumble in just 11 minutes late Sunday night may have grabbed the headlines, but it doesn't tell the whole story on what has been a remarkably volatile week for the gray metal.

The silver trade has never been one for the faint-hearted, but the swings have become increasingly wild, spurred by ballooning demand for the metal as an alternative to high-priced gold, as well as a spate of speculative and technical activity.

It has led to a wide divergence of opinions from analysts on whether to stick around or flee.

Silver prices usually move no more than 2% up or down in daily trade. That trend led spot silver to a record high of $49.831 an ounce on April 25, up more than 60% from the beginning of the year, before the 12% tumble.

Silver futures contracts have continued to fall, losing $3.502, or 7.6%, to $42.576 an ounce Tuesday on the Comex division of the New York Mercantile Exchange.

The selloff has been largely attributed to a hike in trading deposit requirements, or margins, by CME Group Inc, which operates the New York Mercantile Exchange and took action on speculative trade precisely because of the volatility. To trade silver futures, investors typically pay only the margins, which cost a fraction of a contract's full value of about $230,000.

For investors holding hundreds of contracts, the margin changes mean a difference of hundreds of thousands of dollars and push many traders out of the market.

Another key element is that the market isn't trading on fundamentals. There is a surplus of silver that should work to keep prices down, if not for the speculation. This has led to a gamut of opinions on exactly just how secure and lasting the metal's remarkable rally may be.

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