Volatility has returned to silver, which abruptly fell off a cliff in the middle of the night. The ounce was trading around $90 until about 01:50 Paris time, before plunging to a low of $73.485 at 04:00 (down a huge 18%). The grey metal then clawed back part of its losses to trade around $80 at 09:00. It is still down 11% from the previous day's close.

Gold moved less overnight. The yellow metal limited its morning decline to 1.9%, with an ounce at $4,919. Platinum (down 6.3%, at $2,118) and palladium (down 2.4%, at $1,722) are also falling.

A supportive market for silver

Silver is benefiting from a confluence of favourable factors. Like other industrial metals, it is supported by limited inventories, constrained supply with no major new source in the short term, and demand that remains solid. The surge that preceded the correction reflects both genuine physical tightness in the metal, momentum effects and heightened speculation in paper markets, far larger than the physical market, Berenberg says. The research firm adds that silver continues to be driven by structurally high industrial demand, but that rising costs raise the risk of demand destruction if prices run away.

Price volatility creates problems for companies that use the raw material. This morning, the CEO of Danish jeweller Pandora said the group will launch platinum-plated products to limit the impact of precious-metals swings. "We need to decouple the company's performance and the share price from that of the raw material,” said Berta de Pablos-Barbier, in an interview with Reuters. In time, Pandora could cut silver's share of its jewellery portfolio from 60% to 20%.

Recent volatility is also explained by technical factors

Goldman Sachs notes that the volatility of recent weeks has been greatly amplified by call-option strategies used by Western investors to hedge against geopolitical and macroeconomic risks. Rising international tensions and Japanese bond yields triggered a massive influx of call options on the main gold ETF, forcing intermediaries to buy the metal to hedge and mechanically amplifying the rise in all precious metals.

Then the announcement of Kevin Warsh's appointment to the Fed triggered a rapid pullback, as hedging mechanisms reversed and set off a chain of selling-a move that was even more violent in silver because of the low liquidity of the London market.

The timeline suggests these swings were mainly dictated by Western flows, with Chinese speculation remaining marginal and largely physical at these price levels (even if several articles have recently proliferated on the role of Chinese traders in silver's erratic moves).

Most professionals believe high precious-metals prices are underpinned by robust trends, even as they warn about the dangers of speculative spikes, which can become disconnected from fundamentals.