Silver has had two immense breakdowns with the first starting towards the end of April, and second in late September.

Part of this does indeed have to do with margin requirements being hiked, but I suspect there is more at play than this. First, consider that the world is thirsty for dollars given the European crisis and funding/liquidity concerns. This makes dollar-denominated commodities underperform when there is a strong U.S. dollar.

More so than that though, if the world is headed into deflation, then can silver outperform sustainably? One of the reasons often cited by investors in precious metals is that it is a hedge against inflation.

Yet it is now becoming abundantly clear that deflation is a far bigger threat thanks to the European sovereign debt crisis. But what about the idea that silver will act like gold as an insurance policy against a systemic collapse? Price action does not seem to suggest this is likely to happen to the global financial system if that’s the case.

Is there a bottom in sight? We’ll only really know looking backward, but I find it hard to believe animal spirits will return to silver with the incredible declines its experienced all year.

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.

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