Silver suffers biggest drop in 46 years, with 'every man and his dog rushing for the exit'

By Myra P. Saefong

Silver still tallied a ninth straight monthly rise, its longest such win streak on record

Silver futures ended well below $100 an ounce on Jan. 30.

Silver's plunge on Friday was the metal's worst daily drop since 1980 and was described by one strategist as "every man and his dog rushing for the exit."

President Donald Trump's nomination of Kevin Warsh as the next Federal Reserve chair fueled a recovery in the U.S. dollar DXY, with some analysts saying Warsh would be less supportive of lower interest rates than other potential candidates for the role. That prompted selling among precious-metals traders, but that may just be a bump in the road for silver's rally.

To some, Friday's move came as no surprise. "For some time now, it's been clear that conditions in the metals market were incredibly frothy, while signs emerged earlier this week that things were becoming downright disorderly," said Michael Brown, senior research strategist at Pepperstone.

Positioning in the gold (GC00) and silver market was also "clearly, incredibly crowded on the long side, while volatility had increased to, frankly, preposterous levels," he wrote in market commentary Friday. In a market with trading volumes at such high levels, and with "leveraged longs" - traders borrowing funds to buy more assets - so stretched, he noted that "it doesn't take much to trigger moves" like those seen Friday.

'Put simply, every man and his dog [is] rushing for the exit at the same time, forcing price lower, which in turn begets further forced selling.'Michael Brown, Pepperstone

"Put simply, every man and his dog [is] rushing for the exit at the same time, forcing price lower, which in turn begets further forced selling," Brown said, and that serves as a useful reminder that "momentum works both ways!"

On Friday, the most-active March silver contract (SIH26) (SI00) settled at $78.53 an ounce, down 31% on Comex. It logged its biggest one-day percentage decline since March 27, 1980, according to Dow Jones Market Data.

Silver prices last settled at a record high on Monday of $115.504 and were still up by just over 11% for the month. The silver-backed iShares Silver Trust SLV was down 27% Friday, on track for the biggest daily drop based on records dating back to 2006, but it was still up by nearly 19% for the month.

Gold for April delivery (GCJ26) lost 11% to settle at $4,745.10 an ounce after ending Thursday at a record-high $5,354.80. It was still up about 9% for the month, making for its best month since September.

Read: Gold's searing run halted, silver briefly drops below $100 as Warsh nomination to Fed hits dollar debasement trade

The Warsh effect on metals

Warsh, Trump's pick to head the Fed, is a well-known critic of the U.S. central bank and has also been critical about easy money. He's been more aligned with a policy stance that's focused on curbing inflation, which could mean raising interest rates.

Read: Here's how Warsh's Senate confirmation is likely to go as a key Republican threatens to block it

Higher interest rates could boost the dollar and dull demand for dollar-denominated commodities. So for now, "the news of Trump's Fed chair nomination, Warsh, is said to be part of the trigger for today's 'WArSH' out in precious-metals prices," said Peter Spina, founder and president of investor websites GoldSeek.com and SilverSeek.com.

But the market has already seen some big percentage-term price corrections on this "very aggressive price run higher," he said. This is not likely to be any different, he said.

Silver prices "could get flushed out lower below $100 an ounce before returning back above the century mark," Spina said.

The white metal still has a lot going for it. It's benefiting from safe-haven and store-of-value flows - similar to gold - and industrial demand, and is seeing a global supply deficit, said Nate Miller, vice president of product development at Amplify ETFs, which offers the Amplify Junior Silver Miners exchange-traded fund SILJ. There's also increasing attention on silver as a critical mineral, he said.

So some consolidation in silver after such a sharp advance is "healthy and consistent with how commodity markets typically behave following rapid price appreciation," Miller said, adding that volatility, for now, appears well within reason.

Read: Investors aren't scared of record gold and silver prices. Wall Street's price targets are struggling to keep up.

While it's true that the rally has clearly gone too far, too fast, it's not too late for investors to buy the metal, said Peter Grant, vice president and senior metals strategist at Zaner Metals.

Dips below $100 are an "opportunity," particularly around the 20-day moving average of roughly $93, Grant said. Prices on Friday ended well below that level.

Still, "you have to be able to withstand the volatility, which is likely to remain high," said Grant.

Read next: Former Goldman commodities guru sees another decade of rising prices for metals and critical minerals

-Myra P. Saefong

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