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How high-flying silver was humbled

business Updated: May 09, 2011 21:20 IST

On April 25, half a dozen officials from the CME Group, which runs many of the nation’s commodities exchanges, met via videophone to discuss the eye-popping rise in the price of silver, which had doubled in just six months to about $47 (Rs 67,550/kg)a troy ounce.

They didn’t realise it, but they were about to take the first step toward popping a bubble in global commodities prices.

The officials raised the amount of money that buyers and sellers had to put down as collateral to guarantee their trades. The first increase in so-called margin requirements took hold the next day, making it more expensive for traders to play in the market.

But the price kept going up, reaching nearly $50 (Rs 71,860/kg) a troy ounce on April 28. Over the next week or so, the exchange raised collateral requirements even higher, in four more steps every couple of days.

Silver prices finally halted their ascent — and went into free fall. Last Thursday, the rout spread to a wide range of commodities, including coffee, cotton and oil as investors concluded that the yearlong boom in commodities was ending.

“The tremors felt in silver started reverberating throughout the entire commodity patch,” said Richard J Feltes, vice president of research of RJ O’Brien, a large commodities broker.

Silver ended the week down 27%, and crude oil 15%, as most commodities fell. CME had raised margin requirements on corn, crude oil, ethanol and other products.