In financial markets today the tempest is never contained to the teapot. Because of the nature of markets, leverage, and margin, a small, somewhat obscure market like silver can have an outsized effect on the world’s currency markets. Even a modest correction at this point in the precious metals complex could likely create a domino effect as global investors exit their other momentum plays – trades disguised as investments – to meet the margin calls created by excessive volatility. In commodities the exchanges reserve the right to raise margins as a way to insure that holders of the contracts have enough cash in their accounts to weather sizable price corrections. This morning’s sharp sell-off in silver was mirrored by 50 pip sell-offs in AUDUSD & EURUSD.
Jay Norris is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor!