Last week, silver plunged over 10 percent in less than a minute. What does it mean for the precious metals market?
As one can see in the chart below, the price of silver collapsed $1.3 from about $16 to about $14.7 in early Friday’s Asian trading, as more than 25 million ounces of silver traded within a minute. There was no fundamental news at that specific time, suggesting that the flash crash was a result of a large sell order that hit the silver market in thin trading conditions.
Chart 1: Silver prices over the three last days.
The reason behind the plunge is unknown. It could be due to a fat finger, a forced liquidation, option expiry, spoofing, or some kind of manipulation, as the timing is suspicious (the tumble came just one week after a flash crash in gold). However, to avoid confusion, when we say that silver could be ‘manipulated’ (although there is no evidence of such course of action), we mean some short-term aberrations in silver prices as traders try to temporary influence the markets. The key word here is ‘temporary’. Indeed, as the chart above shows, the price of silver promptly reversed course.
But this meaning should not be confused with ‘manipulation’ understood as long-term price suppression. The precious metals market is simply too large and liquid to be systematically directed – indeed, when the liquidity of the U.S. market returned, the price of silver rebounded.
Hence, the latest flash crash in the silver market seems to confirm our thesis that although there may be some minor and short-lived aberrations or direct manipulation, long-term, systematic price repression is not likely. Traders may try to influence the markets, but their ‘manipulation’ should not have systematic or lasting effects in the precious metals market. Therefore, from the fundamental point of view, the latest flash crash did not alter the outlook for silver – its price just continued the downward trend triggered by a recent bearish change in the precious metals market fundamentals. Stay tuned!
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.