Commodities | 11:00 AM
The price of silver has almost literally exploded in 2025. Have solid fundamentals gradually been replaced by herd euphoria?
By Carley Garner, DeCarleyTrading.com
I had been vocal against the prospects of a historic metals rally, but I was wrong.
As it turns out, gold and silver managed to deliver the kind of price appreciation not seen since 1979. Sometimes, low-probability events occur, and they have little mercy for anyone in their way, including those who have been around for a while.
There are fundamental narratives driving prices higher as buyers experience FOMO (Fear of Missing Out) and even outright panic.
However, from where I am sitting, and in my experience, there is no reasonable justification for parabolic price action in any market, and, in commodities, it has never been sustainable.
Nevertheless, the reasons for buying gold and silver were sound; it is the magnitude and volatility of the move that are unusual.
Gold is a portfolio diversifier with a multi-faceted personality. There are times when gold rises to hedge against inflation, but there are times when it doesn’t.
There are times gold rises in sympathy with the stock market, and other times they move higher together. In other words, the primary benefit of having gold exposure in a portfolio is to provide diversification from stocks and bonds, with the goal to smooth overall performance.
Over time, gold has always appreciated, but there are multiple periods spanning a decade or more in which gold prices retreat or trade sideways.
Occasionally, as has been the case recently, a gold-buying frenzy ensues, pulling decades of performance into a year or two.
For instance, gold prices rallied in the late-70s from US$150 per ounce to US$850 per ounce but spent the next two decades giving back nearly all of the rally.
Then, from about 2000 through 2011, it ran from US$250 to US$1900 but spent the next 4 years shaving off half its value and failed to regain its 2011 high for almost a decade.
So, while the headlines are currently touting gold as a better investment than stocks, it must be recognized that statements have been true on two other occasions in history, but both were followed by a decade or two of severe suffering.
Remember, gold doesn’t pay dividends, so there is no getting paid to wait out drawdowns.
The primary reason money is flowing into gold probably isn’t inflation hedging. The bull market started with that as a driver, but as inflation has been trickling down, gold has moved higher.
Further, there is an argument that lower interest rates cause gold to move higher; in theory, that is true because as interest rates decline, the opportunity cost of holding gold relative to bonds diminishes.
Yet, gold has been moving up sharply while rates at the short end of the curve have been cut only minimally, and the long end of the curve has actually seen interest rates increase.
So, this doesn’t explain what we see in metals. Furthermore, just five years ago, interest rates were near zero, and gold was trading under US$2,000, so gold increased in value as interest rates went up, which takes some credibility away from Fed rate cuts as a reason to buy gold today.
I believe the primary factor driving the metals bull market is distrust in holding US dollars as a reserve currency.
Central banks and global business players took note when the US froze US-denominated deposits by Russians (government agencies and some individuals identified as oligarchs with Putin ties) and prohibited dollar-based transactions following the invasion of Ukraine.
Suddenly, it was clear that assets held in dollars (US banks or Treasuries) were fair game for political retribution.
Whether we agree or disagree with US sanctions and equivocal seizures of Russian assets, it is a deterrent to holding US currency.
I suspect many of those looking for a new place to park idle assets likely had similar concerns regarding other political entities and chose gold, and even silver, as an alternative.
Additionally, there is a widespread belief that fiat currencies (paper currencies backed by nothing but a promise), including the US dollar, are a depreciating asset.
Thus, money has flowed out of the dollar and into gold as investors attempt to maintain buying power.
While this is a valid concern and a strategy that has been working as of late, history suggests the slow burn of the US dollar’s buying power due to consistent inflation might not be as painful as a -40% to -50% drawdown in metals if that pattern were to repeat.
This feels like a good time to remind everyone that even the smartest people in the room can get carried away and often end up wrong.
Going back to 1979 or 2011, being bullish on metals was among the best trades on the board, but that was a temporary reality.
When commodities trade like GameStop shares, something is wrong. Recall 2022 energies (crude oil and natural gas), 2022 wheat, 2024 cocoa, etc.
Lastly, in addition to the obvious bullish factors and bandwagon trading, I believe commodity ETFs (Exchange Traded Funds) are the cigarettes of the financial industry.
They are addictive and harmful, but the habit is hard to break.
There are ETFs marketed to retail traders for triple-long or triple-short commodities, including gold and silver. Many of these ETFs persist for years, only to suddenly come into the limelight and attract the attention of the speculative community.
At which time, trading volume explodes, the fund creators make their money, and the underlying commodity and market participants pay the price.
There have been historic bouts of commodity market volatility that can largely, or at least partially, be explained by the sudden popularity of a commodity ETF that lures a massive inflow of capital that the underlying commodity simply cannot absorb in a civilized manner.
The result is the 2020 crude oil meltdown, aided by a blowup by ticker symbol USO. Similarly, the WEAT ETF, which allocates investor funds to the wheat futures market, added fuel to an already-burning fire, as wheat futures traded locked limit-up for at least 6 consecutive trading sessions.
In short, just because everyone in the world wants to have exposure to a particular commodity doesn’t mean there is enough to go around without completely distorting price discovery.
In conclusion, I’m rarely left speechless by markets. I’ve been doing this for a few decades, I’ve seen some things, including the financial crisis, the flash crash, the COVID meltdown, and more, but what is happening in metals leaves me with few words.
Mostly because there wasn’t an obvious single event or catalyst, it has been a slow-burn of compounding of narratives that eventually snowballed into an irrational herd mentality.
The metals markets are broken. We know this because the exchange has altered its margin policy; rather than flat margin rates that are periodically adjusted according to price and volatility, they have set gold and silver margins at a percentage of notional value.
This means that as the metals move higher intraday or day to day, the margin required to hold the position increases accordingly.
To illustrate how the math works, silver futures margin is 9%; if silver is at US$80 per ounce, the value of a single 5,000-ounce futures contract is US$400,000, and the margin requirement is US$36,000.
If silver prices rally to US$100 per ounce, the value of the contract increases to US$500,000, and the margin would be US$45,000.
There are traders spending US$5k for US$110 calls expiring next week and US$20k for options expiring next month. The most liquid option months are seeing the most strikes with bid/ask spreads of US50 cents to a dollar (US$2500 to US$5000).
There are six-figure futures accounts blowing out with a few micro silver futures. I realize that for every winner, there is a loser, so others are having the exact opposite experience, but nothing about that is normal, healthy, or desirable.
It is scary.
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DeCarley Trading (a division of Zaner)
Twitter:@carleygarner
info@decarleytrading.com
www.DeCarleyTrading.com
www.TradingCommodityOptions.com
www.HigherProbabilityCommodityTradingBook.com
Re-published with permission. Views expressed are not by association FNArena’s.
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