Poof! The blow-off in silver capped the extraordinary rise in this precious (and also industrial) metal, which saw the price double in a matter of months. But this week, silver prices plunged more than 20% in three days – the sharpest drop in this volatile commodity since 1983, and very reminiscent of the crash that marked the end of the Hunt brothers’ attempt to corner the market in 1980.
Poof! The euro plunged more than three hundred basis points (three cents in normal language) on Thursday afternoon (European time), after the European Central Bank failed to raise interest rates again on the single currency and did not ‘promise’ it would do so next month. This severely disappointed the foreign exchange market, which had convinced itself that ECB President Jean-Paul Trichet would do what they expected him to.
Poof! Oil prices also plunged yesterday, but this was merely a continuation of a collapse that began on Monday, when crude oil fetched over $114 per barrel in New York and about $126 in London. By Thursday, twelve dollars had been shaved off the price and the speed of the decline was increasing rather than slowing.
The pattern was repeated across most commodities, whilst almost every currency in the world fell against the US dollar – except the Japanese yen, which actually rose back toward record levels of less than 80 yen to the buck. The equity markets were all weaker this week, too, although the scale of the declines in them was moderate compared to the pace and drama evident in the commodity markets.
What does all this mean, other than to confirm such well-known facts as that speculation is dangerous and speculating on margin (wherein only a small part of the value of the investment represents the speculator’s own money, and most is effectively borrowed) is very, very dangerous. Or that markets in which the rise becomes almost vertical, like that in silver, always crash – with the speed of the decline exceeding even that of the rise. Or that when everyone is on one side of a trade — such as has been the case in the foreign exchange market recently, with the dollar reaching pariah status – then a reversal is certain and, when it comes, it will be violent.
To dyed-in-the-wool gold bugs, and the growing band of people who believe that the US is washed up and the dollar doomed, all this is just a buying opportunity. The ‘weak hands’ are being shaken out, but those who bought silver or gold years ago at prices a fraction of current levels see no grounds for alarm. Similarly, those who believe that China and/or Russia are intent on ending the dollar’s role as global reserve currency will not be overly concerned by a brief bout of dollar strength. The underlying trends are still in place, as far as these people are concerned.
They might even be right on that, but that doesn’t preclude a replay of 2008. For those who have forgotten what happened then or, more likely, have repressed that traumatic memory, here’s a brief recap: a massive run-up in commodity prices, in many cases caused by natural developments such as droughts, floods etc., was accompanied by (some say led to, others say was caused by) a rapidly-sinking dollar, stoked fears of inflation all round the world. However, the underlying forces at work, especially – but not only – in the developed economies, were deflationary. The US and other real-estate markets were coming off an historic boom (they still are), China was attempting to maintain rapid growth in the face of inflationary pressures at home and falling demand overseas (it still is), and Europe was committed to a dogmatic belief that monetary union could be made to work, despite deep, fundamental and growing differences between the countries and regions within the eurozone (no change there, either).
The result was that commodity prices blew off to the upside and then collapsed, all with unprecedented speed and strength. This occurred against a background of a slowing American and global economy. Unfortunately, that is exactly what almost all the data and indicators published over the last two weeks suggest is the case today. True the housing market is not in free-fall, as it was then – but the labor market, which is far more important, is in much worse shape now in both the US and Europe. In Asia, Japan has major problems, both entrenched as well as new ones stemming from the natural and nuclear disasters – but its major problem is that it lives in deep denial of its true situation. And China, supposedly the solution for the rest of the world’s problems, is not only part of those problems, but actually a growing part.
Whether this week’s moves are the onset of another major crash, or prove to be a violent but passing storm, is the subject of fierce debate and, obviously, no-one knows. But what is certain is that tremendous volatility, in markets and in the ideas or moods that move them, will continue and, quite possibly, get worse.