Yesterday it was the turn of the metals market more specifically silver to behave a little like the power and gas markets last year. Silver prices dropped 14% in a day as previous buyers of commodities had felt that it would break $15 an ounce as a technical barrier. It became clear that this technical barrier was unlikely to be breached and so traders collected profits by selling this prompted those who were long to start to cut losses increasing the selling fever. The general bearish mood also hit other metals markets, and made risk managers in general look at other commodities.

There is no doubt that commodities recently have had a bubble feel to them with some in the city saying buy commodities and retire next year. If it was that easy it would all be over. One suspects that this was a market correction and with the bubble feel the correction had to be big. The key to VaR limits is that tonight at the end of this week, Volatility will have spiked and this will have made the VaR limits tighten. Traders yesterday knew that this move meant that their limits would be cut and therefore better to do the cutting sooner rather than be in front of a risk committee. This is how power traders should and do react, however, those late on in the process, react more slowly and often not at all. The value of VaR is that it gives you a number which all should be familiar with.