my opinion, the avalanche of volatility descended upon
the global markets thanks to silver. The recent months
have seen silver gaining from near 11000 levels around
Diwali time to the recent 23000+ levels in April. That
shows an appreciation of over 100 per cent in seven months.
Surely this return is rarely seen even in equity markets.
main cause was trader perception, based on the news trigger
that Barclays was expected to launch a silver-dedicated
exchange traded fund (ETF) in July 06, which meant that
the funds so garnered had to be parked in physical investments
worldwide saw a big demand surge due to this ETF, forgetting
that the fund was expected to hit the markets months later
and investments in silver would be made even later.
bigger villain of the piece was the expectation of linear
extrapolation. Players who were otherwise sanguine were
heard advocating this hypothesis with reckless abandon
"If silver has appreciated by an average of
Rs2,500 per month since "n" months, it will
continue to appreciate at the same clip and hit 26,000
/ 28,000 / 30,000 in so many months
figures I heard were indeed dizzying. Equity traders will
recollect how Infosys' rate of growth in the top line
and bottom line numbers started a guessing game in 1999
/ 2000 as to when Infosys would hit Rs50,000 or even when
the topline of Infosys would surpass the (then) current
expectations were so high, that the possibility of a correction
was just not factored into the investment / trading equations
at all. Therein lay the root cause of the problem. Traders
were making merry, leveraging their ever increasing positions
and not worrying about tomorrow. The slightest hint of
a reversal started an avalanche of selling from the weakest
hands, accelerating in velocity as technical stop losses
the exchanges increased the margins was a logical end
result of this mindless speculation rather than the cause
of the fall. Investors in commodities may recollect that
I had advocated that commodity price trends tend to be
longer lived as (especially metals) are mined from underground,
production is sold in forward contracts ranging from two
to eight quarters in advance and end users factor in their
demand supply equations way ahead of the traders and speculators.
appreciation or depreciation in prices is slower than
equities, but is longer lasting. The recent debacle was
a direct result of the speculative excess and unbridled
greed in the global markets that resulted in such unparalleled
price swings. Since commodities are unlike equities on
the basis of their slower / longer trend cycles, the worst
mistake a trader can make is to trade commodities like
this mistake was committed worldwide, price swings
of the magnitude seen in equities was also seen in commodities.
Some interesting beta (intra-day volatility) numbers to
prove my point. Beta measures the volatility in percentage
terms in comparison to 1 per cent volatility in the Nifty
(in this case).
has a volatility factor of 0.11 per cent, gold 0.57 per
cent, copper 0.04 per cent and steel 0.14 per cent. This
shows that commodities are any day far less volatile even
than the Nifty 50 index.
In my opinion, excessive speculation was the sole culprit
behind last week's crash. Traders need to play commodities
like commodities and learn to keep the devil within under
The analyst has long positions in the MCX Aluminium and
MCX WTI Crude at the time of writing this article.