Commodity rout – Mark 2 | FT Alphaville

Commodity rout – Mark 2


So here’s the story.

After dumping last week, silver staged a rather spectacular recovery over the current week. It was led in part by a major inflow of fresh money into silver exchange traded funds… the iShares SLV fund, if we’re going to name names.

Voices from the fund industry were already beginning to dispel the redemptions of last week as nothing more than a technical saturation point, which — if anything  — transfered wealth from the retail money to the smart money. When all of a sudden this happened to the precious metal on Wednesday:

Silver prices were down some eight per cent on the day by pixel time.

But if five successive margin hikes by the CME were to blame for last week’s rout, Wednesday’s culprit was very different in nature. It seems evident that RBOB gasoline futures triggered the market sell off this time round, begining as it did at 10:30 am New York time, just after US EIA stock data showed much larger gasoline stocks than expected.

All you have to do is compare the slide in RBOB futures — trading in which was halted by the CME after it registered a more than 8 per cent fall, only to extend its drop after the limit was lifted — to that of the silver slide above:

The obvious question now though is: what do RBOB futures have to do with silver?

Fundamentally, of course, not much.

But there is one thing they have in common. They’re both the smaller versions of their better known, bigger and more liquid cousin markets: gold and oil.

And with commodity markets increasingly subject to black box trading, algorithimically-controlled stop losses, and gearing via funds, market depth really means everything. These two markets don’t have it to the scale accustomed to in oil and gold.

It’s thus possible that what started off as technical breakouts simply drew too much attention. And with too much money in a tiny weeny market in terms of capitalisation — especially when compared to equities — all hell breaks loose when there’s even a slight hint of a sell-off.

And then the black boxes take control.