Why did spot silver crash so badly in 2008?

theordore
By theordore on Sat, Jan 3, 2015 - 11:22am

 

 What follows is a question from a "newbie". What is your rank ordering of the factors listed below  (and others I may have missed), in terms of their contribution to the price crash in spot silver from mid- to late 2008?  From the summer to the end of 2008, spot silver fell from around 18 down to 8 or so.  

Possible factors:

The forecast that an economic depression would mean a big fall in industrial demand for silver

Market makers seizing the opportunity to drastically widen bid-ask spreads

Contagion of deep fear causing bids to simply dry up, so any one needing to sell had to more or less accept a  "give away" price.
 
Thanks in advance.
 
 

  

1 Comment

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5418
2008 silver drop

theo-

Here's my list.

* all commodities dropped during that same period - oil, gold, copper, etc.  Take copper.  It dropped from $4 to $1.25.  And oil dropped from $140 to $32.  Silver's drop was more mild by comparison, but since it is partly an industrial metal, it fell right along with all the other economically sensitive commodities.

* commodity futures are traded on margin.  A small drop in the underlying (5%) can result in a margin call for someone trading on the edge.  In a panic, there are large drops, which result in a larger number of margin calls, which drive more selling, which result in more margin calls.  The serial unwinding of margin/leverage amplified the move down.  This happened during the 1929 stock market crash in equities (people were operating on a 10% margin back then) and that same situation holds true for commodities today, only with thinner margins.

* contagion from the general drop in assets contributed to the fall in silver.  If you have to raise cash to repay debt (or make margin calls), you sell whatever you can, so even unrelated "good" assets get thrown off the lifeboat during a general deleveraging and/or move to "risk off."

I do not believe that short term "bids drying up" or widening spreads contributed much, if anything to the price drop.  A whole lot of traders just needed to get out to reduce leverage and/or meet margin calls, so the price had to drop until buyers appeared, rinse-repeat until nobody was left who needed to sell.

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