Historic declines followed by huge gains. Debates over true underlying value. Concerns tied to leverage, retail exposure, and how broader financial markets could be affected in the event of a sharp reversal.
Five years ago, all of that was part of the debate about meme stocks. They emerged in January 2021 with staggering gains for unprofitable companies, powered by retail investors and quasi-organized by online chat groups.
Today, similar, if not identical, concerns have arisen regarding the precious-metals markets. Gold prices soared past $5,600 an ounce, retreated nearly 20% in two trading sessions, and then posted their best single-day advance since the 2008-2009 financial crisis.
Silver is feeling a bit like a meme trade as well. The metal rose more than 200% over a six-month stretch to a record peak of $121 an ounce late last week. It tumbled 32% the following day, the most on record, only to gain nearly 9% to its current level of around $88.50 an ounce.
Precious metals aren't the only gainers. Industrial metals such as copper and tin also achieved record highs last month. Copper, in fact, has gained more than 50% from its early August lows, partly because of uncertainty about tariffs and disruptions to supplies from an important mine in Indonesia.
"The recent selloff in precious metals was remarkable for both its speed and magnitude, but driven largely by the unwinding of crowded speculative positions and forced liquidation, rather than a deterioration in macro or fundamental conditions" said Ewa Manthey, commodities strategist at ING.
The market's run-up, however, did have some "bubble like" elements, similar to the meme-stock craze of early 2020. Back then, GameStop shares added $20 billion in market value over a three-week stretch. AMC Entertainment, a rival meme stock, gained $50 billion over five months.
"The [upside move in precious metals] was largely fueled by a wave of speculative buying from China, from retail traders to larger equity funds rotating into commodities, with fresh flows pushing prices to extreme levels before last week's abrupt reversal," Manthey said.
"As positioning became crowded and volatility picked up, exchanges and brokers began raising margin requirements -- a warning sign that the market was becoming overstretched," she added.
The CME Group, the world's biggest commodities market, raised margin requirements for silver trading on several occasions during the metal's run-up. It ultimately switched to a percentage-based system, as opposed to nominal dollar amounts, to protect investors from the surge in volatility.
That, too, is a reminder of the meme-stock drama of 2021. Robinhood, the online trading group, restricted users from adding to positions in names such as GameStop and AMC. It effectively eliminated the ability to use leverage by increasing the amount of margin required to maintain a position on the platform to 100% of the size of the holding.
Last week's metals slump, tied in part to President Donald Trump's move to nominate Kevin Warsh as the next Fed chair, also helped trigger a sharp pullback in stocks. The S&P 500 fell nearly a full percent from last Wednesday's close into the close on Tuesday, while the Dow slid by a similar amount in just two sessions last week.
In 2021, the broader index moves tied to meme-stock volatility were even sharper. The S&P 500 lost around 3.3% over the final week of January that year, as hedge funds that had bet against meme stocks liquidated other positions to cover losses and margins. The Cboe Group's VIX volatility index spiked past the 30-point mark.
What happens next in precious metals, however, is anyone's guess. A trade that exploits the difference between silver prices in New York or London and Shanghai will be tested when markets are closed for China's Lunar New Year celebrations later this month.
Gold, meanwhile, has a history of damaging pullbacks tied to excessive leverage. Bullion lost of a third of its value in less than a year after peaking during the global inflation and energy crises of 1980.
Haman Hussain, climate and commodities economist at Capital Economics, isn't expecting an elevator drop for the bullion. But he does expect lower prices.
"It is difficult to know the full extent of leverage in gold and other precious metals markets, but there are some indicators that suggest speculative and leveraged positions are causing extreme volatility," he said.
"We are forecasting gold prices to fall further by about 30% before the end of this year to $3,500 per ounce and much larger falls in other precious metals," he added. "That said, we doubt that prices would fall linearly, and we expect similar episodes of sharp price swings in the future."
Feels like February 2021, doesn't it?
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