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Rein in Rampant Speculation Or Face The Black Silver Swan
By Dian L. Chu, EconMatters
If you think the crude oil market has gone totally out of control in the past month or so, observe the Silver. The Silver market has basically gone parabolic in the week of April 17, going from $41.75 on April 15th to $46.69 on April 21st--a 12% move in 5 trading days, topping off the move with a 5% move on Thursday (See Chart).
As Silver is a thinly traded market, one thing the CME could do is to raise margin requirements for Silver speculators; otherwise risk is setting up the silver market for an record-setting crash, which could impact many other markets in the process of correcting, especially other commodities like Gold and Crude Oil.
A Silver Contagion
We are not talking about a 5% correction setting up at these levels for silver, we are talking in terms of a 20% down day that poses a contagion effect to markets in general.
The reason the contagion risk in the Silver market is that while Gold is going up half a percent to one percent, Silver is logging in 3.5% days routinely (See Chart below). Well, what goes up, must come down... eventually. So, when this market breaks, it is going to break hard to the order of 10% easily.
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| Chart Source: FT.com |
That kind of market selling will not occur in a vacuum, especially since commodities have been trending up as a group, i.e., the same hedge funds and banks are trading all the risk-on commodities as well, like Gold, Copper, Crude Oil, Wheat, etc.
In other words, if Silver gets a 10% down day, which it almost will for sure, and if it isn`t cooled off considerably with proper margin requirements instituted by the CME, then, the rest of the commodities will be forced to overshoot to the downside as well.
ETF Trading & Portfolio Rebalancing
There are a couple of reasons for this. With the advent of commodity funds, silver is part of the basket of commodities in the funds. Also, because traders will not want to fight the tape, shorts will come in and take advantage of the selloff in Silver to push other commodities down through ETF trading vehicles.
Moreover, the same banks and hedge funds trading silver are also involved in the major commodity groups as well, and they will be liquidating other positions to keep their portfolios balanced with regard to risk. So expect a lot of portfolio rebalancing to take place if the Silver market drops 10% in a day across many hedge funds.
Price & Margin Out of Balance
The CME routinely sets margins based upon contract prices. So, if Silver goes up $10 more in price, then the ratio of margin to price goes down. In order to realign margins with the higher price, CME would raise the margins.
The reason this becomes a problem is that if price gets too far out of balance with margin requirements, the risk goes up, because traders will not be properly sized with regard to risk for a potential correction, and many trading accounts could be devastated due to overleverage.
Black Silver Swan
In addition, if Silver speculators are all heavily leaning towards one direction as the action of recent silver price movement suggests, then, there is an increased risk of a major market dislocation, thus creating a ‘black silver swan' day. That’s exactly the kind of event that exchanges try to prevent from occurring, as it is extremely unhealthy for markets, and bad for business.
It is obvious to anyone observing the Silver market that it is overheated to the Nth power. The longer CME ignores the problem, the worse the consequences will be down the line. When all the other risk-on commodity trades are putting in 1% days, and Silver is putting in 5% days, then you know the longer this goes on, the higher probability that this trade and market could end very badly.
Flash Crash 2.0?
As the very real possibility of a 20% two-day correction is moving towards becoming a very real probability, it could bring down a lot of other markets in the process. Remember, we had the flash crash around this time last year? Well, if the Silver market isn`t cooled off, it could potentially be one of the catalysts for another broad flash crash this year.
Raise Margin Requirements by 30%
The easiest way for the CME to lessen the probability of an epic crash in the Silver market, and the subsequent public and regulatory inquisitions, would be to raise margin requirements by at least 30%, as the starting point.
Actually, the CME could be a little late based upon the manner in which silver speculation has gone bizzerk, especially over the last trading week--the market has simply become parabolic. The CME could have raised margin requirements once Silver broke $40 an ounce, and without a doubt they should have raised margin requirements on the 14th of April, before this latest 12% weekly move.
The longer the CME fails to address the problems in the Silver market to rein in excessive speculation, the more risk there is of an extreme market crash.
Silver A Screaming Short
With gold/silver ration setting new 28-year low record almost everyday in April, it looks like the necessary elements are already set in motion for another horrid crash and burn contagion scenario--but this time originating from Silver--due to the interconnected nature and electronic evolution of modern day markets. Any intervention effort by that time would most likely be futile in the face of a multi-market algo contagion.
Related Reading - Crude Oil vs. Gold, Silver and Copper
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Interesting to read all the new responses, thanks for all the current news and updates. Hope to read more very soon.
moulin farine
I want to express my admiration of your writing skill and ability to make readers read from the beginning to the end. I would like to read newer posts and to share my thoughts with you. oilseed expeller
The latest trading buzz around this move in silver reminds me of the time I blew up my portfolio after gold hit $1,000 for the first time near the Bear Stearns weekend. Leveraged to the hilt long, I had turned $7,000 into $170,000 in six months, mainly using (or mainlining) options on futures, following gold from $666. In the clear, clear focus of hindsight, I realize my main problem is not having had a system. So, among other things, I didn't know when to exit and take profits. So I kept trading "fundamentals" (feelings, really) and ended up losing everything by October 2008. There are few certainties in life, but I am here to tell you that if you don't have a proper trading system, you are fucked, my friend, whether sooner or later. And if you don't have a proper system, and you have a predilection for excessive leverage (it's the financial equivalent of speed/coke/heroin), then you are cosmically fucked, sooner rather than later. I learned the hard way - and after reading Covel on trend following - that you need to have a system that tells you, objectively, in the heat of battle (1) what markets to trade (aim: de-correlation), (2) how much of a market to trade at one time, (3) when to go long or short, (4) when to take a loss and (5) when to take a profit. If your trading system does not answer those key, key questions, then you sir (or ma'am) are dead meat, it's only a question of when. The nature of the current chatter about silver's latest moves on these threads suggests to me that there are not a lot of people out there with systems that will keep them alive through this volatility. I'm talking about the would-be traders here, not the buy-and-hold forever silver owners. If you are trading silver and you don't have a system, do yourself a favor and read Michael Covel's book. It could well save your portfolio. It damn well would have saved mine.
and that's why I'm new_meat--really trying to avoid the dead meat thingie. - Ned
Very useful anecdote, and advice. +1.
The only real bubble is the dollar bubble.
Fortunately that bubble is collapsing now and things are getting back to equilibrium.
That's what's happening with silver. It's slowly getting back to equilibrium with the dollar.
Equilibrium is somewhere around $150 per oz. So it has a way to go still.
don't make me do math. i don't do math. never did. never could.
and don't want to now.
all i care to relate is that i acquired $100k of gold in 2003.
today, it is carrying a value of $450k.
do you know of a similar gainer?
and as to selling it....for what. usd? or euros?
even swissies aren't as kosher as they once were.
no, holding gold, silver for the long term is the smart decision.
I keep hoping for a 30% down day (place first APMEX order) followed by a 10% down day (I'll empty my checking account to buy all I can). Been hoping for this since $30. I know others here have too.
It seems incredible to me that the author of this piece, has it all figured out by "Chart Action".
"Chart Action" may work for some simple algo's and meatspace traders, but in doing that, you are assuming a "functioning market" based on true price discovery - good luck finding THAT in this bullshit Silver market.
The author, IMO, is simply looking in the rearview mirror of what has happened in the past in this market, and has completely missed the bigger story...
She fails to even mention the MOST important fulcrum in this curent market: the widespread question of "what if the Silver Bullion that is SUPPOSED to be "there", really isn't "there"??
I, for one, believe that SLV, GLD, the COMEX, and the LBMA are a total SHAM, and the the PM Bullion (especially Silver) that is claimed to be "present and accounted for" will be proven NOT to be.
I'm sure if it turns out that the Physical Silver Bullion actually available, is HALF of what is claimed to exist, the charts will take all that into account, and we'll STILL see that 20% correction, because the "charts never lie".
Sheesh.........
Hey JohnyVenom......
I have a snake bite I need you to suck the poison out of.....
Ooopps....thats not poison,but you can still suck it out.....
And it's not in the front, but rather the rear.
So, I want to see the leverage. I want to see the conveyor belt of cash loans to leveraged silver buyers. I want to see those loans bundled up and sold up stream...
Yes, these's a LOT of hot fiat money floating around. But in a market for a real commodity, with limited supply and limited leverage...we have a free and increasing supply of monopoly money chasing a rather static sized supply of finite silver. Without leverage, that's just inflation...or hyper inflation.
Is this,must be Blonde ,and hired by JPMorgue,for real....?
Silly bitch,trix are for kidz.
cmon people. 99% of comments are ultra silver bullish on blogs like this. This doesnt look good. Everyone knows the silver will be $50 next week, $60 in two weeks, $100 by the end of the year... I was 100% invested in paper silver and I sold everything last week. I made a fortune this year already, so if it doesnt go down i will be fine. If it does i will buy back.
I agree with everyone talking about fundamentals, but what happens when euro goes down? Euro is something like 40% in the dollar index. What happens when silver starts to correct and all the sheeple with their margin trading accounts start to get scared? I remember a few months ago, everyone was soo bullish, silver to the moon and so on. Then silver had a 20% correction and everyone on Turd's blog was going crazy. A few weeks and people were scared to buy silver @ $26.5. The same people were buying like crazy when it topped @ $31. When it passed $30 people knew it will be $40 next month... and then when it went down to $26 the same people were talking it could go to $15.
You see, Im scared now, because everyone "knows" the silver can only go up. I would never short it, I only took my profits.
I don't understand. You just spent some long paragraphs describing a silver bubble, and how you would never be long, yet you would never short it? Why not, if you have any conviction? I will assuredly be shorting, when I sense it's time.
You can't have it both ways, and expect to be taken seriously.
ummm...one person on Turd's blog was saying it was going to $15 and Turd called him and all the other trolls out with his, now famous, Turd's Bottom. He picked that perfectly...(sorry).
Anyhoo, glad you are out of your paper silver...thanks for sharing, and remember that Euroturds buy PMs too when their fiat goes in the shitter.
Anything else?
hey im an euroturd, i bought at turd's bottom (CFDs in USD). All im saying is this is too much for me. I took my profits and now i will see what happens. I live in a small eu country and there is no way the euro stays at these levels. It is no better than USD.
When I say blogs like this I think of turd's blog and a few others. ZH is great but the more popular you becoum the more sheeple you will atract.
Blogs like this?
What other blogs are there that are like ZH, with it's unbroken track record of being RIGHT, over and over and OVER AGAIN? I'd like to know, because I would love to read them.
Sentiment of ZH is a counterindicator of NOTHING, and anyone who thinks it is is a moron, and deserves the 100% loss he will take if he trades on said counterindications.
Futher, gold and silver have always been special in regards to bubbles--they can store an infinite amount of purchasing power without losing utility. Drives into gold and silver are built not only on greed, as are bubbles, but also fear of a collapsing currency. When greed and fear point in the same direction, you don't have a bubble, but a new currency.
All you gold and silver bugs will be squashed next week.
Don't you know that bugs are destined to rule the Earth?
Especially radioactive ones...
Monday, 4/25: Gotta tell you, I sure am enjoying "getting squashed" so far!
Hey Author - you want to rein in speculation tell Bernanke to shut off the printing press.
The inflation genie is already out of the bottle and silver is just the latest commodity to get caught up in the fed bubble blowing. There are a long list of commodities that have run up over the last 12 months - look at sugar and cotton earlier this year and oil is set to revisit the old highs. I'm paying over $4/gal for gasoline and I'm supposed to believe that it's because of speculators?!!?
This analysis has totally missed the target.
I just saw a roll (20) of silver eagles in the last day sell on Ebay for $61.00 per coin. Slightly higher than the ConX spot price! Demand for physical versus paper tells good story - or rather reavels a conflict with reality.
A drop of 10-15% in prices will reduce the available supply of physical. The sidelines are littered with those who are waiting for any pullback to join the physical party they missed all the way up. I think part of this move higher is a switch from unlimited paper supply to very limited physical. An increase in margins would drive even more people into the real stuff.
I don't think we will get a meaningfull drop in prices until we slice through 52.50US. The US$ is toast, bonds and treasuries are toast. Nothing except gold and silver is left to preserve ones wealth.
Silver and gold need to double or triple just to negate years of BS inflation figures and massive gov't expendatures.
Silver price and the US$ will converge at 64.5 sometime this summer.
If Silver falls 20% in two days , I am such a buyer. Margin requirements are irrelevant when one is prepared to pay cash for an entire contract and take delivery.
You won't take delivery of anything but paper promises.
The days of metal delivery are over. Ask Eric Sprott.
Buy it online in small quantities like the rest of us...
You JPM Conspiracy Idiots, you actually believe JPM is still short some Silver trade from a couple of years ago, get a clue, JPM has been on of the biggest proponents of commodities, namely crude oil pumping every week, their house is long commodities like every other I-Bank on Wall Street and short the Dollar. There is no way in Hell they would not have closed out some stupid Silver trade at $20 an ounce. Especially when their entire commodity team has been long commodities as a group since the Jackson Hole Speech.
The loss on some stupid sliver trade is minimal compared to the giant sums of money made during the past 6 months in all commodities across the board from Wheat to Crude Oil. They knew what the trade was going to be after Jackson Hole, JPM would simply take the loss, and go long across the board if the short wasn`t already closed out months before the speech. But to think they would hold onto one against the inflation spectrum trade because they had some pre-existing short in Silver is just rediculous, and not how trading works on Wall Street. They have risk managers that tap traders on the shoulder, and say "have you closed out that position yet?"
In fact, every trading group has an independent risk manager assigned to oversee trading groups, and at certain points they automatically liquidate losing positions, especially at a firm the size of JPM. Any substantial size trading operation always has independent risk controls to avoid the occurrence of this very type of trade from ever getting this out of hand - yes occasionally there are break downs -and these are famous rougue traders - and guess what the whole world knows about it - not some clandestine, mythical short from two years ago that has never been covered by JPM.
If there was one shred of evidence for such a short still being in place, given the hype about this position, you do not think an analyst would bring this up on a JPM Earning`s conference call?
The amount of Conspiracy laden misconceptions and memes that continually propogate on this site is hilarious if not so down right tragic given what this says about humanity and rational, logical thought processing skills:)
Who the fuck cares if JPM is still short or long in whatever! Silver goes up more, I make more.
Don't think they liquidate their short position on silver yet. Don't know how it will play out as they are only doing it on behalf of the FED
Your entire naive and/or disingenuous diatribe assumes one key point, and has one fatal flaw: that JPM operates as a normal, honest, purely-for-profit business entity, and not as a handmaiden and tool of the Federal Reserve and the US government, as they have in fact demonstrably operated for many years. Wake up --- reality will be there waiting for you.
I am willing to bet that "Market Analyst" is not aware that Blanchard and Co. sued Barrick and JPM in 2003 charging manipulation of the gold price.
Barrick admitted to the charge but claimed diplomatic immunity because they were "acting as agent for [the Fed] a branch of the U.S. Government". Barrick's lawyer further argued that the suit was invalid because it did not join all the co-conspirators, but unfairly singled out ABX. The judge agreed.
Yes. And yet the hoards that endlessly screamed "conspiracy theory" are still screaming "conspiracy theory" even though the conspiracy is admitted and proven. To be sure, we cannot identify every government and central bank agent participating in the manipulation of the "monetary metals", but nobody but an intentional liar or clueless fool can claim the conspiracy does not exist.
JPM still has huge short positions in silver, and I believe they will take advantage of the very low volume over this long weekend to SMASH the price of silver before the expiration of options on Tuesday. Of course, this digs them deeper into their long-term losing position, but they don't care, because the federal-reserve will give them unlimited fresh, new digital fiat to compensate them for their paper losses.
Glad to see the herd all in silver and gold here. I shorted SLV @ $45.48 and GLD @ $147.00 on Thursday. I bought ZSL @ $14.65 in after hours. I've been waiting a long time for the blow off in PMs. I suggest you sheep check the DXY, EURO and AUSSIE charts for Friday.
Suit yourself, Skippy--silver was up over a buck yesterday.
Ya pays yer money, and ya takes yer chances...
Friday trade was BS. Didn't even show up on Kitco. Fiat $ will not be destroyed. I can't believe how many of you think that it will be. The fed's only power is in fiat. The $ is going to soar from here. Cash is KING. We're in a deflationary debt DEPRESSION that has several more years to go. At least you can melt your physical down for bullets.
Sunday, 16:24
Hey, Venom! Ya havin' fun yet?
Hey Johnny Bravo! We missed you!
Don't forget to mock us about all the canned ham we have buried in our backyards, and how it only costs $5 to dig silver from the ground.
Now run along before you start actually getting on my nerves ---- I routinely have chunks of trolls like you in my stool.
Damn, you must have one hell of a roto-router bill.
Hahahahaha.
This same writer writes anti-precious metals crap in the Kitco commentaries.
I think (it) is a Jon Nadler protoge'
Definately full of shit ,and propaganda thats for sure.
Any potential disingenuous, fiat-loving, bankster-worshipping, PM-hating disinformation artist and pro-Establishment propagandist could have no finer teacher that Kitco's Jon Nadler.
Star Trek IX: "The Wrath of the Conned"
Moby Dick, actually.
We know...but dark humor is the final frontier ;-)
Conned!!!...LOL.
"Well, what goes up, must come down..."
In our New Age Economics, just BTFD.
On a more serious note, this past week has shown a lack of similar participation by the silver mining companies. Now I think that would be an interesting question to address and might lead to a better understanding of why silver is doing it current acceleration.
Or, one might re-calibrate the price of silver into one based on oil rather than $$$. Perhaps what we are witnessing is really the implosion of fiat...the horse race will be among all the alternatives to holding paper..."Its silver in the lead and gaining down the home stretch, with copper dropping on the outside, but oil making a final bid..."
Maybe our best use of analysis is to handicap what will do best as fiat heads for the knacker???
Law of Physic says what goes up must come down, is that right? Hmmmm...waiting impatiently by the side line for the coming dip!!!! BTFD!
I'm sure that those who have held onto Confederate $1000 bills and Weimar Reichsmarks will be thrilled to hear that.
"In other words, if Silver gets a 10% down day, which it almost will for sure, and if it isn`t cooled off considerably with proper margin requirements instituted by the CME"
Go ahead and remove margin from the silver market entirely. Please. The rise is not about over-leveraged speculators. It is about exchanging fiat, the printing of which is completely out of control, for the real thing. If the margin levels are increased one more time it will take all of a few hours to recoup any losses.
It is going take another Volcker to stop silver, and I don't see him coming through the door.