Silver's fall from grace: High global exposure did it in

Some time back, it was commodities that seemed to have a lot going for them. But the fortunes are changing. Thanks to the deepening global uncertainty due to the Greek debt crisis, the commodity markets across the world are all bleeding after they received a heavy pounding from investors on Monday.

The flight for safety syndrome is the main trigger which is causing investors to seek refuge in the ultimate safe havens of cash and the dollar. This explains why the commodities are losing out badly.

Spot silver’s fall was really sharp. Its widespread industrial use means the bullion’s exposure is high and is far more vulnerable to worries of economic growth than gold. It has hit its lowest circuit since January, and is down as much as 45 percent from its April peak.

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[caption id=“attachment_92666” align=“alignleft” width=“380” caption=“Spot silver has hit its lowest circuit since January, and is down as much as 45 percent from its April peak. Reuters”]  [/caption]

People have realised silver is no proxy for gold as it has as much industrial application as base metals, and there is no point holding on to it, said Gnanasekar Thiagarajan, director of Commtrendz Research.

At 1 pm, the gold futures contract for October delivery on the MCX was trading 5.1% lower at Rs 25,352 ($513.2) per 10 grams while the December silver contract plunged 8% to Rs 49.670/kg. Earlier in the trade, gold hit the 6% lower limit, while silver tanked 12%.

For gold, the initial limit is 3%, while for silver it is 4%. There is no halt to trading once the initial limits are breached, but there is a cooling-off period for 15 minutes if the second limit of 6% is breached.

Overseas spot gold fell 5% to $1,569.10 a troy ounce, while silver sank 8.3% to $28.46/oz after US exchange operator CME Group. Friday said it would raise the collateral requirements for gold, copper and silver.

“Fear has gripped the market…so buyers are on the sideline,” said Anand James, chief analyst with Geojit Comtrade Ltd.

Ask analysts about the sudden churn, and they have no doubts that the factors at work are the rising appeal of the dollar and US Treasuries, liquidation by hedge funds looking to cover losses and volatility dimming gold’s lustre as a safe haven.