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The reason why the price of silver futures falls by the limit is that …
Sep 23,2020 08:04CST
translation
Source:Futures daily
The content below was translated by Tencent automatically for reference.

SMM Network News: September 22, the domestic silver futures price fell by the limit, the market panic selling appeared. Why did silver, which rose sharply from July to August, continue to fall sharply in September? The author believes that it is mainly caused by several reasons: first, the Fed's short-term loose expectations have failed, and the space for the decline of the nominal interest rate of the US dollar has been limited; second, the second outbreak of the epidemic in Europe and the United States, especially the aggravation of the epidemic in Europe, has triggered the mood of risk aversion in the market. however, due to market concerns about liquidity, the risk aversion function of European and American bonds is stronger than that of precious metals; third, the low real interest rate of the US dollar has rebounded and the investment demand for silver has cooled significantly. Fourth, the early surge in gold and silver led to crowded trading, and the high inventory of silver means that silver consumption is actually not strong, which makes silver in the lack of liquidity marginal drive, and under the risk of overcrowded trading, there is a sharp fall in bulls' self-trampling.

Risk aversion funds did not flow to precious metals.

Recently, the turmoil in the international financial market has intensified. The VIX index, which represents market panic, climbed to 38.8 points on September 4 and reached a high of 31.18 points on September 21. Although it fell back in late trading, it reflected increased market volatility and significantly increased market demand for risk aversion.

However, precious metals have also suffered heavy losses as stock markets in Europe and the United States have plummeted. Why is safe-haven demand not favored by precious metals? In terms of safe-haven assets, there are government bonds of major economies, especially US Treasuries, and precious metals. The principle of risk aversion of precious metals is that in times of market panic, because precious metals are zero-coupon assets and have a certain liquidity and low correlation with other risky assets, funds will allocate gold and silver to hedge the beta risk of the risky portfolio. Further, the sharp fall in risky assets means that money will flood into the US bond market as a safe haven, driving down yields, and precious metals are zero-coupon assets that will also be overweight because yield expectations remain unchanged. One special case, however, is that if market turmoil triggers a liquidity crisis, US bond yields will rise rather than fall, and precious metals are also at risk of selling.

The Fed's expectations of increasing its size and easing have failed.

The Fed's interest rate meeting on September 16th dashed investors' expectations that the Fed would be more relaxed. According to the Fed's monetary policy statement, the Fed announced that it would keep interest rates at 0% mure 0.25% unchanged until the US job market returned to its best, but this did not expand its monthly asset purchases and ruled out the option of controlling the yield curve. The Fed also stressed that the economic situation is still much worse than it was at the beginning of the year. The Fed's medium-and long-term pessimistic forecasts may suggest that economic growth will be more difficult from now on than in late spring and early summer, and that the economy is still at risk of falling again.

In the absence of further easing from the Fed, both the dollar exchange rate and real interest rates rebounded, putting pressure on the price of silver. From the perspective of the US dollar exchange rate, there may be two factors that support the periodic rebound of the US dollar exchange rate in the short term: first, the US election brings short-term safe-haven demand; second, the epidemic in Europe and the United States diverged again at the end of August and early September, which makes the downward pressure on the euro zone economy greater than that of the United

In terms of real interest rates, the Fed did not accelerate easing, which led to a rebound in dollar nominal interest rates. However, the sharp fall in international crude oil prices and the slower-than-expected growth of US CPI have cooled inflation expectations and the real interest rate of the US dollar has rebounded significantly from its low level. The financial attribute of gold and silver depends on the real interest rate of the US dollar. The rebound of the real interest rate of the US dollar will weaken the financial attribute of silver and accelerate the decline of silver under the weak commodity attribute.

The ebb of demand puts pressure on prices

Investment demand for silver has cooled significantly in the face of the failure of Fed easing expectations and falling inflation expectations. Silver holdings in the world's largest silver ETF--SLV fell to 17211.13 tonnes as of Sept. 22, climbing to a record high of 18072.29 tonnes on Aug. 13, according to data. Judging from the long-term trend of silver, the decisive factor is not supply or consumer demand, but investment demand. As a result, high inventories and weak industrial demand will exert great downward pressure on silver under the ebb of investment demand.

On the whole, the loosest period of global liquidity has passed, although it has not yet turned to the stage of monetary tightening, but in view of the weakening of the marginal effect of liquidity on asset prices, the cooling of investment demand is the main reason for the sharp fall in silver. The rebound in the exchange rate of the US dollar and real interest rates is the trigger for the cooling of silver investment demand, while the self-trampling of crowded trading exacerbates the decline in silver.

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