Monday, May 02, 2011

War on Precious Metals: Silver Prices Plunge On Higher Credit Margins

As silver prices have been on a juggernaut, the CME group tightens credit margins to exert control. The result: silver prices take a plunge.

From the Bloomberg,

Silver futures plunged as much as 13 percent, the biggest intraday drop since October 2008, as CME Group Inc. raised the amount of cash that traders must deposit for speculative positions.

The metal for July delivery dropped to $42.2 an ounce before trading at $43.875 an ounce at 11:46 a.m. in Singapore. The CME increased margins by 13 percent with effect from the close on Friday, according to a statement...

Silver is the best performer this year on the Standard & Poor’s GSCI Index of 24 commodities. The metal led the way in April as commodities beat stocks, bonds and the dollar for a fifth straight month, the longest stretch in at least 14 years.

Gold increased 9.2 percent this year and is set for its 11th annual gain, while silver jumped 43 percent as investors increased their holdings in exchange-traded products to a record 15,518 metric tons on April 26.

Hedge-fund managers and other large speculators cut their net-long positions in New York silver futures by 26 percent in the week ended April 26, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will gain, outnumbered short positions by 24,995 contracts on the Comex division of the New York Mercantile Exchange, according to the CFTC.

Initial margins increased to $14,513 per contract from $12,825 and maintenance deposits rose to $10,750 from $9,500, said CME, parent of Comex where the futures are traded.

I am reminded of the climax of the last bubble in silver during 1980, where the Hunt Brothers unsuccessfully attempted to corner the silver market but was foiled through the same measures.

Notes the Wikipedia,

But on January 7, 1980, in response to the Hunt's accumulation, the exchange rules regarding leverage were changed, when COMEX adopted "Silver Rule 7" placing heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.

Yet the conditions of the silver market in 1980 is different than today.

Silver, then, had been rising along with interest rates, where many credit former US Federal Reserve chairman Paul Volcker for ending stagflation by tightening the money supply which prompted interest rates to rise.

However, globalization and commodity supply glut could have been a factor too.

As Dr. Marc Faber wrote,

I would therefore argue that even if Paul Volcker hadn't pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the USA.

Today, global governments have still been flooding the world with money. In addition, global interest rates remain artificially depressed.

This suggests that downside pressures on silver prices from tighter credit margins would likely to be temporary. As I have repeatedly been saying no trend moves in a straight line.

Though CME Group is a publicly listed company (Nasdaq: CME), it’s a wonder if the US government has a hand in this.

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