The Reason Silver Dumped

[JohnQPublic]

PM Selloff Reason: CME To Raise Margin Requirements For Silver From $5,000 To $6,500 (http://www.zerohedge.com/article/pm-selloff-reason-cme-raise-margin-requirements-silver-5000-6500)
Submitted by Tyler Durden on 11/09/2010 15:23 -0500


And if that doesn't work, there is always confiscation.

"CME confirmed silver margins raised from $5000 to $6500 (30%) effective 11/10 settl - no other metals effected"

Presumably, this affects the maintenance margin. And is a lovely way to kill paper longs.... but not shorts, of course.

This is also the last remaining self-regulating way for the market to tell the genocidal lunatic in the Eccles building to go fornicate himself, and his excess liquidity.

[PatColo]

I don't think this 30% silver margin increase is diabolical, on the contrary it was inevitable. The standard silver futures contract controls 5K oz silver. Silver itself ran up over 50% since Aug. So even at 30% margin requirement increase, traders are still putting less down per value of silver they control per contract, than they were just a few months ago- and add in how, ahem, "volatile" silver's been (a factor in determining margin requirements), $6500 to control $140,000 worth of silver (5K oz @ $28), that's still remarkable leverage, 1 : 21.5 (not complicating this with "maintenance margin" for now).

So this'll cause some short-term adjustments among some small traders, but I'd guess the bull quickly resumes, and today's a nice entry point to go long or add to existing. :)

[beefsteak]

Good summary, Pat.

+1

[JohnQPublic]

I'm sure silver will recover quickly (it has already gained back $1).

Harvey Organ (http://harveyorgan.blogspot.com/2010/11/extreme-volatility-in-price-for-silver.html) agrees with Zerohedge (which is usually the case), which does not contradict what you are saying, PatColo:

Here is the announcement, which has sent silver down to $26.50...

CME Group to raise silver margins by 30 percent

NEW YORK, Nov 9 (Reuters) - CME Group said on Tuesday it will raise its silver futures trading margins by 30 percent to $6,500 an ounce from $5,000 an ounce effective Wednesday.

U.S. silver futures surged as much as 6 percent before retreating, with volume rising to an all-time high on Tuesday, boosted by extreme price volatility and possible short covering, traders said.

Exchanges often raise margins to mitigate risks as price volatility increases.

[Trinity]

Let these paper traders get whip sawed, we don't need them.

[osoab]

Jim Rickards - Three’s Company, Silver Margin Change (http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/11/9_Jim_Rickards_-_Threes_Company,_Silver_Margin_Change.html)


With the reaction in the metals today, Jim Rickards of Omnis made note of today’s margin change in silver with a new exclusive piece for the King World News blog. Interestingly, Rickards had just discussed in his recent KWN interview the extent to which an exchange will alter the rules to protect its shorts. Well, the first shot has been fired.

November 9, 2010

Three’s Company

By James G. Rickards


November 9 (King World News) There's been a lot of buzz about today's price action in gold and silver. Beginning with the Monday push upwards based on the Zoellick op-ed in the Financial Times, the market surged upward through most of the day today and then hit a serious air pocket with gold falling 2% and silver falling almost 5% in a short period of time late in the trading day.


On a technical basis, there's nothing surprising about that; we've seen similar moves before and I expect to see them again. The overall trend has been upward with higher highs and higher lows. The market seems to find a strong bid at progressively higher levels even after sharp corrections. Nothing too disturbing there and nothing to indicate that primary trends are not still intact.


What was noteworthy was the catalyst for the pullback, specifically an increase in margin requirements for silver futures contracts. There was no comparable change in gold futures margin but as often happens in markets there was instantaneous contagion from silver to gold notwithstanding the different circumstances. Again, no surprise that the markets correlate to a great extent even when the news only affects one market or the other.


This is a pointed reminder to the readers and listeners of King World News and something we have discussed before. Most markets consist of two parties, the buyer and the seller. But in futures markets there's a third party in every trade which is the exchange and more specifically the rule making bodies and margin setting panels on each exchange. They act not in the best interests of buyers or sellers but in the best interests of the exchange itself and its statutory duty to maintain orderly markets. Of course, the word "orderly" can be in the eye of the beholder. What may be an "orderly" price spike to a long may be a "disorderly" rout to a short. Either way, the exchange has the last word. They have many tools at their disposal. They can increase initial margin (what you put up when you open a contract) increase the frequency of variation margin (make you post intra-day instead of end of day) and require "trading for liquidation only" which means longs can go short and shorts can go long but no one can expand a position or increase the open interest. Finally, an exchange can suspend physical delivery and allow offsets and rolls only. All of these rules have been invoked many times and will be again.


Invariably the parties disadvantaged by these moves complain that the exchange is "changing the rules in the middle of the game". That's a naive and pointless perspective. The fact is that the ability to change the rule is itself a rule. The exchange is not changing the rules, they are just utilizing an alternate set of rules that are already in place. Traders should stop complaining and read the rule book. It's all there.


What is more intriguing is what motivates the exchange officials to use these rules? Is it truly a disorderly market (the usual reason) or is it part of a larger coordinated effort involving Federal regulators and policymakers to do whatever it takes to push up prices of risky assets such as housing, stocks and junk bonds and push down prices of safe-harbor assets such as gold and silver?


The point is, when buyers and sellers transact in futures markets, they're never alone. Exchange monitors are always looking over your shoulder. Never ignore the power of the exchanges and regulators and always remember they will use this power when it suits them, not you.

[PatColo]

I'm sure silver will recover quickly (it has already gained back $1).

Harvey Organ (http://harveyorgan.blogspot.com/2010/11/extreme-volatility-in-price-for-silver.html) agrees with Zerohedge (which is usually the case), which does not contradict what you are saying, PatColo:

Here is the announcement, which has sent silver down to $26.50...

CME Group to raise silver margins by 30 percent

NEW YORK, Nov 9 (Reuters) - CME Group said on Tuesday it will raise its silver futures trading margins by 30 percent to $6,500 an ounce from $5,000 an ounce effective Wednesday.

U.S. silver futures surged as much as 6 percent before retreating, with volume rising to an all-time high on Tuesday, boosted by extreme price volatility and possible short covering, traders said.

Exchanges often raise margins to mitigate risks as price volatility increases.



I must believe that "$6,500 an ounce" line is a spectacular typo. They can only be referring to "per silver contract" or "per 5000 ounces".... I googled the headline and I see it's reprinted all over the place, with the glaring typo.

Contract Specifications:SI,COMEX (http://tfccharts.com/chart/SV/W)

Trading Unit: 5,000 troy ounces
Tick Size: $.001/oz. = $5.00
Quoted Units: US $ per troy ounce
Initial Margin: $6,750 Maint Margin: $5,000
Contract Months: All 12 months.
First Notice Day: Last business day of month preceding contract month.
Last Trading Day: Third last business day of the month.
Trading Hours: Open outcry trading is conducted from 8:25 A.M. until 1:25 P.M.
Electronic ACCESS: 3:15 P.M. on Mondays through Thursdays and concluding at 8:00 A.M. the following day.
Sundays, the session begins at 7:00 P.M. All times are New York time.


Edit: FOX biz news seems to have printed their own copy, correcting the error:
CME Group To Raise Silver Futures Margin To $6,500 From $5,000 (http://www.foxbusiness.com/markets/2010/11/09/cme-group-raise-silver-futures-margin/)

note they specify "Silver FUTURES Margin" in the headline, and the text reads in part:
Traders will now be required to put up $6,500 in margin to hold a benchmark 5,000-ounce silver contract overnight. The margin had been $5,000.

[JohnQPublic]

Harvey has a hard time maintaining and even using his blog. It is still very worthwhile though! Quality of information is more important than presentation.

[JohnQPublic]

From Harvey Organ today (http://harveyorgan.blogspot.com/2010/11/huge-trading-volumes-at-silver-and-gold.html):


"Now for the scary stuff: the estimated volume today on the gold comex is 273,632. This number will exceed 300,000 or higher when confirmed tomorrow.
The confirmed volume for yesterday: a gigantic 364,443 contracts with some minor rolls from the December to February month. The banking cartel threw everything in yesterday trying to quell gold's demand."


"And now more scary stuff:

The estimated volume at the silver comex today came in at a very high 138,255. This number will surely rise for tomorrows confirmed volume.

The confirmed volume at the silver comex yesterday was revealed at a record 201,217 contracts or 1.005 billion oz of silver.

The world produces around 600 million ounces, so yesterday's volume was 166% of yearly silver production." :o