Silver Manipulation & Management

The fundamentals of silver continue to be strong but were due for a correction.  $36 silver is the next support level.  A major reason for the rapid and steep decline was a change in margin requirements for the paper market.  This tends to remove under-funded speculators and the weak at heart. 

Margin is collateral(stocks and/or cash) that the holder(speculator) of a financial instrument(silver contract) has to deposit to cover some or all of the credit risk of his counterparty (most often his broker or an exchange).

For instance, if the margin requirement is 25% then the speculator can buy $10,000 in futures contracts with a minimum of $2,500 in cash or stock in the trading account to cover the margin.  However, if the trading exchange increases margin to 50%, then the speculator must come up with another $2,500 to bring his balance to $5,000.  Often the trader will begin closing out his outstanding contracts to cover his new margin requirement.  With more sellers doing this, the market drops as it did last week.

A trading exchange will protect itself by increasing margin requirement to the borrowers of assets.  Margin can go to 100% if the volatility is too risky for the exchange (management) or if they want to temporarily move the market down(manipulation).  The good news for those of us who believe that the long term fundamentals support higher prices is that soon we will have another buying opportunity for metals and their underlying stocks.  When will be the optimum time to add to positions?  Only Our Heavenly Father knows for sure.

The news: CME Group, operator of the Comex division of the New York Mercantile Exchange, announced a pair of margin increases late Wednesday, the first of which goes into effect after Thursday’s close and another on Monday. Additionally, the Shanghai Gold Exchange raised the margin requirement for silver contracts. “This has prompted many investors to withdraw from the silver market, reflected in outflows from silver ETFs,” Commerzbank says. “Yesterday, the world’s largest silver ETF, iShares Silver Trust, reported the second-largest daily outflow since the fund was launched, at 522 tons. The price correction is likely to continue.”

Comments are closed.