(Bloomberg) — Silver recovered most losses after its biggest one-day drop in more than five years, with a lingering supply shortage keeping the metal on track for a 35% monthly gain.
The white metal climbed above $78 an ounce on Tuesday, following a 9% slide in the previous session, while gold edged higher after its steepest drop in two months. Tighter margin requirements on exchanges and market indicators signaling an overstretched rally contributed to Monday’s declines, with thin liquidity exacerbating recent price swings.
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The selloff was “largely technical: early profit-taking on precious metals’ recent spike, leveraged long positions being unwound, and tighter margin requirements adding pressure,” said Dilin Wu, a strategist at Pepperstone Group Ltd. “The fundamentals haven’t changed.”
Some exchanges moved to rein in risk amid heightened volatility, with the margins for certain Comex silver futures contracts raised from Monday. When an exchange boosts margin requirements, traders have to put up more cash to keep their positions open. Some speculators don’t have the extra money, so they’re forced to shrink or close their trades.
Speculative investor interest in China has also been a key driver of silver prices in recent days. Elevated buying in the Shanghai Gold Exchange’s silver contract in December pushed premiums to a record high, dragging other international benchmarks along. The blistering rally provoked the country’s only pure-play silver fund to turn away new customers, after repeated risk warnings went unheeded.
Despite the pullback, gold and silver remain on track for their best annual performances since 1979. The metals have been supported by strong central-bank purchases, inflows to exchange-traded funds and three successive rate cuts by the Federal Reserve. Lower borrowing costs are a tailwind for commodities, which don’t pay interest.
Silver’s latest jump came just two months after the London market suffered a full-blown squeeze as flows into ETFs and exports to India eroded inventories that were already critically low. London’s vaults have seen significant inflows since then, but much of the world’s available silver remains in New York as traders wait for the outcome of a US probe that could lead to tariffs or other trade restrictions.
This year’s silver rally “is being shaped by real metal scarcity,” according to a note from Indian brokerage Motilal Oswal Financial Services Ltd. “Physical deficits, policy-driven supply restrictions, and concentrated inventories are increasingly dictating prices, signaling a durable shift in how the silver market is priced and traded,” analysts Navneet Damani and Manav Modi wrote.