Silver fell, after plunging 20% on Thursday, as a lack of liquidity led to wild price swings in a market struggling to find a floor.
Spot silver tumbled to as low as $64 an ounce in early Asian trading. It's retreated more than 40% from a record high hit on Jan. 29 and wiped out all of its gains from a spectacular rally last month. Gold also dropped for a second day.
The white metal has always been subject to more violent price swings than gold, due to its smaller market size and relative lack of liquidity. But recent moves, the most volatile since 1980, have stood out for their scale and speed, amplified by speculative momentum and thinner over-the-counter trading.
“When volatility rises, market makers naturally widen spreads and reduce balance-sheet usage, leaving liquidity weakest precisely when it is needed most,” Ole Hansen, head of commodity strategy at Saxo Bank AS, said in a note. Until a degree of order returns, “volatility risks feeding on itself,” he said.
A multiyear bull run for precious metals accelerated last month, in a surge underpinned by heightened geopolitical risks, concerns about the Federal Reserve's independence and speculative buying in China.
Investors built up large positions in precious metals through January, piling into leveraged exchange-traded products and call options. That rally came to an abrupt halt at the end of last week, with silver seeing its biggest-ever daily drop on Jan. 30 and gold plunging the most since 2013. Markets have been extremely volatile since then.
The more liquid market for gold has coped better than silver, though. Many banks and asset managers have reiterated bullish long-term outlooks for the yellow metal this week. A Fidelity International fund manager who sold before the crash said he was ready to buy again, while Deutsche Bank AG still expects gold to get to $6,000 an ounce.
Spot silver fell 2.8% to $68.9640 an ounce as of 8:38 a.m. in Singapore. Gold dropped 0.7% to $4,745.27. Platinum and palladium declined. The Bloomberg Dollar Spot Index, a gauge of the US currency, rose 0.1%, and is up 0.7% for the week.
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