Why Precious Metals Fell Today

A look at what caused today’s pullback in precious metals and miners, when it is likely to end, and some encouragement that the bull market is nowhere near over.

Precious metals have been incredibly volatile over the past week, and that volatility cuts both ways. Today, precious metals moved lower, with gold down 4.59%, silver declining 8.73%, platinum falling 13.63%, and palladium down 16.58%. I was expecting this pullback, as I said throughout my update yesterday, due to how stretched silver and the platinum group metals had become. However, there is no reason to panic, and the bull market in precious metals is not over by any means. In today’s brief update, I’ll show you where precious metals and miners stand and what I expect next.

I want to start by discussing the three main reasons for today’s decline in precious metals. First, they had surged significantly and became very overbought recently, so a pullback is normal and expected. Second, we are still in holiday trading mode, so volume has been thin across the financial markets, which often amplifies moves and also contributed to Friday’s precious metals surge. Third, the CME futures exchange increased gold margins by 10%, silver by 13.6%, and platinum by 23%, which usually causes precious metals to dip temporarily.

I know that many people become conspiratorial about futures margin hikes, but these adjustments are normal and should be expected after the kind of price surges we’ve seen. As a quick refresher, margin in futures trading functions like collateral. It allows traders to put up a relatively small amount of capital to control a much larger position in a commodity such as gold, silver, oil, or wheat.

For example, a futures contract might allow a trader to control $100,000 worth of a commodity while only putting up $10,000 in margin, giving them 10:1 leverage. If the value of that commodity rises to $130,000, the margin should also increase to $13,000 to maintain the same 10:1 leverage ratio. If the margin doesn’t increase, the leverage on that position rises, which can expose both the trader and the exchange’s clearing house to greater risk. That’s why exchanges raise margin requirements after sharp price surges like we saw in precious metals.

However, these hikes often force over-leveraged traders to reduce or exit their positions if they don’t have enough funds to meet the new margin requirements, which can lead to short-term dips in the commodity. This is a simplified explanation, but I wanted to provide some context, since many people are unfamiliar with how margin works and that often leads to conspiratorial thinking. In short, I don’t believe the recent margin increases in precious metals are part of a conspiracy to suppress prices.

So let’s take a look at what happened in precious metals today, starting with silver, which was the focus of today’s pullback rather than gold. Silver sank 8.73% on heavy volume, but that move only brought prices back to last Tuesday’s level, and it still managed to close above $70 in COMEX futures.