Silver's plunge spreads to oil prices, copper

Oil prices fall below $100 a barrel. Silver, down 27 percent since Friday, is leading the charge down for oil and other commodity prices.

Shannon Stapleton/Reuters/File
A trader works with a telephone receiver in the crude oil and natural gas options pit on the floor of the New York Mercantile Exchange in New York, April 25, 2011. The downturn in silver spread to oil prices May 5, 2011, which fell below $100 a barrel for the first time since March.

By John Melloy,

A cascading crash in commodities beginning with silver a week ago spread to oil and copper as exchanges took steps to rein in speculation, economic data pointed to a global selloff and big name investors took profits.

Silver was the first to crack five trading days ago and is now down more than 27 percent since its high last Friday, including a 10 percent drop today alone. The silver panic forced traders to sell other hard assets to raise cash, with the selling spreading to oil and copper over the course of the last two days.

Oil fell below $100 Thursday, more than 13 percent from its high on May 2. Copper plunged more than 3 percent, extending losses from its high five days ago to greater than 7 percent. Selling in silver intensified this afternoon into the end of open outcry trading as traders borrowing on margin got a tap on the shoulder to pay up under the new CME requirements. Of all the declines, it was the participation of copper in the bloodbath that worried investors most.

“I think of copper as a better indicator of economic activity than some of the other commodities,” said Karen Finerman, president of hedge fund Metropolitan Capital Advisors and a ‘Fast Money’ trader. “For example, oil can move on unrest in the Middle East and gold and silver can move more easily on speculation and some of these margin requirements.”

The CME has hiked silver margin requirements five times this month. The moves helped push silver down from within $1 of its highest price ever. Selling intensified this week after the Wall Street Journal reported that big investors like George Soros were taking profits in the metal. Yesterday, it was revealed that Carlos Slim, the richest person in the world, had begun to sell the metal.

But traders kept coming back to the drop in copper Thursday as the real reason for concern. Silver, like gold, is used as a store of value and has a history as an actual currency as well. The metal was therefore getting a similar speculative boost based on concern the Fed’s easy money policies are leading to inflation. It doesn’t have nearly the industrial use of copper, which is an essential component in construction.

“Copper is the most important metal when it comes to the economy,” said Dennis Gartman of The Gartman Letter. “Silver? Not so much.”

Weekly jobless claims came in higher-than-expected Thursday, following a disappointing reading on the service economy earlier in the week. A private payrolls report from ADP this week signaled that the official jobs report released Friday could fall short of analysts’ expectations.

“My belief is that we are now in a period of time where the market narrative is changing from a strong, global growth story with a U.S. 2011 GDP bump up to 3.5 percent to now a story of uncertainty over China growth and whether the US can achieve even 3 percent,” said Andy Busch, global currency and public policy strategist at BMO Capital Markets.

If copper is signaling an economic double-dip, then the intense selling could spread from the pits of Chicago to the equity trading floors of Boston and New York. History shows copper has often been a leading indicator of the equity market.

“Many bull markets have a copper top,” said Jeffrey Hirsch, editor in chief of the Stock Trader’s Almanac.

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