Silver gets a tarnished look

THE bursting of a bubble in the silver market in the past few days has caused hefty losses to gamblers and speculative investment funds in Britain and North America.

The spot price soared to $8.35 a troy ounce in early April from just under $6 at the turn of the year and a 2003 low of less than $4.40, but then collapsed by a quarter in two weeks to stand at $6.20 yesterday. Gold has also fallen recently, from a peak of about $427 an ounce.

Paul Hare at spread bookmaker City Index says: 'Clients have been on the wrong side of the silver move. A lot of people who were long have been stopped out. Others are still long, and hurting. Hardly anyone has been short.'

Precious metals analyst Rhona O'Connell says the past few weeks have been 'an absolutely classic silver performance', reminiscent of other bubbles such as 1987 when it reached $11.50 a troy ounce.

'Of all the precious metals, silver tends to attract a particularly large speculative element. Silver is a Cinderella - it spends months or years below-stairs, comes to the party in a burst of glamour and then leaves it in a chaotic hurry.'

There have been fundamental influences behind the sell-off. Talk about a US interest-rate rise has been building up since the release of better-than-expected jobs figures on 2 April and this has boosted the dollar.

Since commodities such as silver and gold are priced in dollars, a stronger currency tends to result in lower precious-metal prices.

Silver is also an industrial component, used in photo-processing and bonding wire. Its production is relatively insensitive to the metal's price as 80% of output occurs as a by-product of mining other metals or from scrap.

Gambling on the Bank of England interest rate decision on 6 May is gathering pace, with a subtle shift in sentiment this week.

Odds on betting exchange Betfair on Monday suggested a quarterpoint rise in UK rates was a racing certainty. Indeed, it was possible to get the equivalent of 6/1 against a no-change decision.

But, after lower-than-expected inflation figures on Tuesday and the revelation on Wednesday that only one of the nine MPC members voted for a rate rise in April, the odds against a no-change verdict next month had fallen to 2/1 yesterday.