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Options Expiry Fells Silver; Metal Regains Ground

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Ahead of an options expiry later in the day on Tuesday, silver lost some of the wild gains it had recorded on Monday, when it courted record territory from 1980 and fell short by only $0.17. It took gold and oil with it on the way down as nervousness over a Fed meeting later in the day drove nervous investors to shed risk. However, it managed to retrieve some of its lost gains, with U.S. silver futures recovering from a 5.4% drop to $44.61 per ounce to come back to $46 in early trading.

Reuters reported that buying by options sellers when key strike prices of $45 and $50 were in danger of being exercised spurred some of the gains on Monday. But the options expiry, combined with concern over the price of oil—Saudi Aramco's chief executive expressed the kingdom's discomfort with the current price of oil—and worries over the upcoming Fed meeting sent U.S. crude futures down by more than $1, and dragged gold along for the ride. Spot gold dropped 0.6% to $1,499.60 per ounce, bringing to an end a seven-day record-setting rally that saw the per-ounce price soar to $1,518.10 on Monday. Mining companies weren’t spared either and saw some downside.

Koen De Leus, strategist at KBC Securities in Brussels, was quoted in the report saying, "There are concerns that the Fed's loose monetary policy is going to lead to inflation. Investors are cautious ahead of the meeting."

Peter Fertig, a consultant at Quantitative Commodity Research, was quoted saying, "The rally has been strong, it's not surprising to see profit-taking ahead of the FOMC meeting. Markets expect it will be a dovish statement from the U.S. Fed, but there are worries about them ending [Quantitative Easing] ahead of time."

Another contributor to the rise in silver prices could be expectations of rising demand from industry in general and the solar industry in particular, according to some analysts. Concerns over the dangers of nuclear power in the wake of Japan's disaster have governments looking for alternative sources of power.

HSBC said in a note, "Although demand for silver is certainly increasing from this quarter we do not believe it explains the entire rally in silver prices. Nonetheless the political climate may favor solar power and announcements regarding government support or increased research for solar panels may support silver. Much of the buying in silver has been retail and momentum driven."