Speculators seen leading commodities crash

By Sarah Turner and Michael Kitchen, MarketWatch

SYDNEY (MarketWatch) — Analysts offered a wide variety of reasons for Thursday’s plunge in commodities, but some agreed the main force behind the drop might simply be a matter of stampeding speculators.

“It all began with silver, which started falling sharply late last week when CME Group increased margin requirements on trades,” said BMO Financial Group Chief Economist Sherry Cooper, in a note Thursday.

Indeed, the CME’s repeated hikes to the silver-margin requirements sent the metal, which as of April 29 had risen nearly 60% for the year, tumbling, with benchmark silver futures losing more than 25% since then.
But a variety of other news, including a Wall Street Journal report that billionaire financier George Soros was selling off his holdings, helped the losses snowball, and on Thursday, silver fell 8% on the Comex division of the New York Mercantile Exchange, its largest one-day percentage drop since Dec. 1, 2008.

This touched off massive selling across the commodities complex.

“Silver really just burnt off in a big way and that fed through to other commodities,” said Michael Turner, strategist at RBC Capital Markets.

Oil (NEW:CLM11) was especially hard hit by Thursday’s follow-on crash, dropping as low as $99.35 during the North American session, its heaviest drop in percentage terms since April 2009. Crude futures continued to decline on Friday and were recently off over 4%. Read more on oil’s Friday drop.

Turner says that the dollar’s rise after the European Central Bank failed to signal further near-term interest-rate hikes early Thursday helped turn silver’s drop into a stampede out of almost all commodities. Read more about the European Central Bank


Independent oil trader and author Dan Dicker agreed, saying crude’s reaction to the drop was “great proof of just how much speculative money there was in the oil market.”

Noting that much of the drop included a large volume of margin selling, he added that the fall also showed “just how much stupid money there is in the oil game.”

But despite the speculative nature of the drop, analysts at Lloyds Bank said Friday that some economic fundamentals actually point to even lower prices for some commodities.

“Many of them have looked frothy for a while and have perhaps accelerated beyond the pace justified by the global recovery,” they said in a research note.

But they also added that “some perspective is required,” citing the fact that the Thomson Reuters/Jefferies CRB Index, which tracks global commodities prices, is “actually marginally below the levels of five years ago, so it’s hard to argue that commodity prices are headed for a massive decline given that global [gross