Silver Prices Plunge on Rumors of Lawsuit

Silver prices plummeted around the world Monday after a market analyst said lawyers in the United States are preparing to sue over an alleged scheme to corner the silver market in an attempt to drive prices higher.

Gold may have lost its luster for investors, but silver shined so much last year that speculation has been rampant that its rise has more to do with manipulation than solid physical and investment demand.

Martin Armstrong, president of the advisory group Princeton Economics International, has argued for weeks that the silver market is being manipulated. He was quoted Monday by the Financial Times in London as saying a lawsuit seeking class-action status will be filed soon by a group of lawyers he declined to identify.

Armstrong’s comments reinforced rumors that roiled the market last week, causing prices to fall sharply.

Silver for March delivery tumbled an additional 16.3 cents, or 2.9%, Monday to $5.48 an ounce on the New York Mercantile Exchange. At the height of its rally, on Dec. 23, silver for March delivery reached a nine-year high of $6.24 an ounce.

Silver futures prices shot up last year as inventories of the metal in exchange warehouses fell to their lowest level in more than 12 years amid reports of surging world demand for its use in amateur photography and jewelry. But prices began to slide in late December, and tumbled further last week amid speculation that the Commodity Futures Trading Commission, the industry regulating body for futures and options, has launched an investigation into possible manipulation of the silver market.

The commission, as is its practice, declined to comment on whether an investigation is or will be underway.

As long as futures have been traded, there have been rumors and innuendo--often fruitless--that someone with deep pockets is attempting to corner a specific market by buying huge quantities of a commodity when prices are low and selling them after they reach a desired price.

Such a scenario offers the potential for huge gains--or great losses.

In 1996, copper prices collapsed after it was discovered a trader for Sumitomo Corp., which controlled 5% of the market, had hidden billions of dollars in speculative losses. And the silver market collapsed in early 1980, leaving the Hunt brothers with $1 billion in losses, after they first drove the price up from $6 an ounce to more than $50 an ounce within a year.

But in both those examples, prices were on the rise at a time when supplies were plentiful. Silver demand since 1990, however, has far outpaced production amid soaring use of silver nitrate for amateur photography in Russia and China. Silver also has benefited from increased jewelry buying in India and elsewhere and its growing use in electronics.