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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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Silver's price is an effect not a cause. Like a patient's body temp being 100 degrees is not the fault of the thermometer. The patient is sick. The thermometer is just the messenger. As the saying goes: "don't shoot the messenger". In this case, the patient is the U.S. dollar and the entire doomed economic system of the Western World (but mostly that of the USA). "Flee to safety" is a normal human reaction to seeing danger. Remain and be eaten by the tiger if you like - personally, I'm outta here! With such a small float and the world all suddenly wanting in, the price is going to go up. Economics 101: "supply and demand free market pricing".
How much was the writer of this article paid to do so by JPM? I am serious.....I want full disclosure...
I'm thinking not much. As far as hit-pieces go, that one was quite amateurish. I mean really, there are persuasive arguments to make if you are a good propagandist (or a trapped short) but this demonstrated not even one. F-
I give it a B+ considering it spawned so many awesome comments.
Hit-piece grade inflation!
Asia, IMHO, silver needs a $10 to $14 pull back based on a traditional chart view of a 50% pull back from a run up. There I agree with you.
However, paper/electronic trading this stuff is different than the folks who like to know they really own it and want to physically have it. If real silver is $48 and I sell it, I get $48. When it falls (if) $10 and I want to buy back in it will cost me about $5 premium to buy it back. That assumes that I can get to the store before it starts a reversal and goes higher. If it falls $14 and I sell then I can buy back in at say $38 if I can get there before it does a bounce. So, us real silver persons can not make multi trades in minutes or seconds.
Another problem for your scenario is that many with real silver may have a saving and or checking account with some USA currency in it. That is the other side of the trade or the hedge for some of us. Cans of coffee, food, and Hershey bars bought last summer also worked well against the Dollar. When prices and the Dollar go stable, then the silver bug may get stepped on.
You may also keep in mind that some have bought in at $40 and some of us bought in at $4 because we had no faith in the “system” A 50% hit will not impact many of us, and certainly will not instill faith to buy paper or electronic stuff we can not put our hand on.
The trust of the People is broken and many of us have no desire to be involved with the trillions in the derivative markets. It is not caution; it is reality.
Silver may continue to rise it may fall, no one knows but:
the trend is our friend
price action is the only action
calling a trend reversal is a lot more dangerous than staying in the trend
prices can go on rising a lot longer than they 'should'
all of these cliches are cliches for good reason
If you feel a reversal is near prepare but why would one put good money on a long shot low probabilty bet?
I'll stay long until Mr Market tells me what to do. I'll listen very carefully to him and only him.
I am sure somebody bought Oil at $143 in 2008 when GS made the $200 call, and everybody was a peak oil theorist. It only took 6 months to find crude oil at $33 a barrel, they couldn`t give the stuff away. A surprise ending to QE2 on the 27th could send Silver down $10 bucks on Margin calls and forced liquidations at the close.
These are commodities, they have no real value. Remember it`s not like you cannot go get more of this stuff out of the ground. When we hit the next rate tightening cycle, you will not be able to give this stuff away. Everybody will have a bunch of worthless "under water" physical, glorified coin collections that serve as useless momentos of a bygone era of "When Silver was the hot market"!
Really, no different than any other faze or fad, if you miss this one then don`t fret, another fad will come in on the next bus of time. I know it is different "this time"!
Even people who don't know what they are talking about are entitle to their own opinion!! Men, I love ZH!
I see a future customer :) I've got 6.8 tonnes of wheat sitting in a shed. And a really nice grain mill. And a real high quality gold tester. Since you won't likely have any bullion when the time comes, I'll be happy to take your wedding ring :)
Edit: Might buy some more wheat too :)
I imagine you can clearly see any possible colonic polyps with your head in that position.
That said, when Time Magazine has gold and silver on the cover proclaiming how this is the only thing that will save your ass in the current financial armagedon, then I will sell.
.....a simple, yet effective top picking tool with an excellent track record.
That scenario is about as likely to be seen as their magazine's cover proclaiming Ron Paul as "America's Savior".
In other words, it is never going to happen. Time Magazine is just another part of the financial/political status-quo Establishment, and will ALWAYS have a kneejerk and preprogrammed animosity towards the precious metals, even after (maybe especially after) their reincorporation into the monetary system is far more advanced than it is today.
Business guy calls local coin store: "What do you have for inventory in 100 oz silver bars and 1 oz gold coins?" After quick inventory, given quantities (not insignificant). Business guy: "I'll take all of it." Sends his sec down with check to collect his new stash. And I would assume that is not the first or only call he has made or will make.
Interesting times we live in these days.
Oh, and my wife, who has been a goad in my side for over a decade re my metals purchases, yesterday says to me "Maybe I should buy some silver as an investment, what do you think?"
Dudes and Dudettes, people are starting to pick their noses up out of the grass and sniff the breezes...
According to this article, http://www.telegraph.co.uk/finance/markets/8466825/Fear-and-greed-index-at-lowest-since-financial-crisis.html, the VIX, the current premium for puts, and the CS Fear Barometer Index indicate we are days from a top.
Now consider what would happen if Bernanke announced that QE was done.
It would be the perfect storm. Stocks and silver would plummet.
Therefore, that is exactly what will happen, and then of course Bernanke will announce QE3 and the market and maybe silver too will spike and reach a new peak.
What I would like to know is where the bottom will be in this sharp V. It will only last for a day or two.
.
All of this being good reasons for holders of physical silver to be unconcerned about transitory price movements, regardless of their magnitude and direction.
If silver is a "thinly traded market" why would it affect all other commodities, hedge funds, etc and cause this big selloff as the author says? Only a few nuts ( like me for example) would be affected who thinks silver will go much higher.
Jim Rogers, yes, even Jimmy expressed dismay at the "parabolic" rise of silver. This worries me too so i cut back for this shiney metal....however, I added PALL and momre USO which are not as volatile. Huh, I never thought silver would be more volatile then palladium or oil, but here we are.
GL! to everyone whatever your strategy is.
Jim Rogers actually said said silver is not parabolic yet...his definition of parabolic is triple digit silver in 2011...he did say that if it goes parabolic then all parabolic rises end badly...with one caveat: unless the reason for silver's parabolic rise is USD collapsing...
He also said he hopes silver does not go parabolic because he would like to buy some more...
So, thanks for referring to Jim Rogers but maybe a closer reading of what he actually said would be of benefit to all...including yourself.
http://www.zerohedge.com/article/jim-rogers-comments-triple-digit-silver-and-issues-warning-parabolic-moves-always-collapse
Methinks it isn't going to stop at 50. That's what's scary. When the biggest breakout of all time happened down around 18 an ounce, it was an omen. Silver may rise like this indefinitely, and this is a harbinger of Armaggedon for the fiat currency system. There does not have to be a top in a fiat collapse as we all know. Now we must buy metals from here on out and for those of us who were buying and preparing for these days, these days are now here and we are being lifted into the heavens by the death of the dishonest fiat system. Our only remorse is that there have been many who did not listen, many who do not know, and many of us who wished we could have invested more. After 2008, it was time to get on board if you hadn't done so already, and been clairvoyant enough to buy at much lower levels. However, with a fiat monetary system, if you do what was done in 2008, the controllers have crossed the rubicon and now unfortunately the paper system we all grew up with is disintegrating before our eyes. Yes, there will be another sell off orchestrated by the controllers. But then it will by time to buy one last time heavy, below 50 per ounce. Then, it will be on to triple digits friends. It is time for gold and silver to return! I can hear the sounds of the galloping dark riders far off in the distance! It's time to hide!!!
Thanks Tyler for posting all sides. Appreciated!!
Well I actually think there's something to this. While I'm making money hand over fist with SIVR and AGQ, I noticed that a few way OTM puts (aka lottory plays) I purchased on both broke even on Thursday. We're definitely due for a correction - how much is the question. Then truly do BTFD.
"Parabolic". LOL
The only thing parabolic about silver is the whimpering of the shorts as they take it in the ass.
Ferfuksakes....I'm still finding pre65 quarters in rolls I buy from stores and local banks.
This poster is full of shit.
The very moment you read, "parabolic"; you can stop and do something more productive. There are no parabolic price curves. The curve of prices sometimes becomes exponiential; it never becomes parabolic. The person committing this illiteracy is signalling you that they got their education from the internet, and basically they know nothing. The rest of the article bears out this statement; it's just an opinion; it doesn't actually say anything. If you said blah, blah, blah, blah, it would be equally meaningful.
None of you guys know shit....
A security is in the parabolic state when the price plotted using a logarithmic scale shows an increasing rate of change in the price. On a log scale, a constant rate of growth will result in a straight line. Going parabolic means the that the price curve on a log scale is indeed parabolic....
A classic example of linear growth is POT from about 2004-2008. Ag is going parabolic as we speak.
exponiential...oh dear.
Glad you post your IQ otherwise I might doubt it.
A parabola is an exponential function.
Back to 9th grade with you!
http://en.wikipedia.org/wiki/Parabola
I never see anyone writing about this, but there must be an awful lot of scrap silver hanging around. At a certain price level, people will be queueing up to throw their granny's stupid old teapot into a crucible. It could all add up to quite a bit of metal. What price level would that be do you think? And why haven't I seen Silver4Cash adverts?
How much silver might be hiding in attics and closets is almost impossible to quantify. But...we know that an awful lot of it came out of hiding in the late '70's and early 80's during the last bull run.
I see no reason to believe that those heirlooms were ever replaced. Since that time silver has been out of fashion...unloved. Silver tableware is a hassle that requires lots of care and cleaning and I don't think most people bother.
I don't know how much scrap silver is out there, but I'm willing to bet it's less than was out there in 1975.
I bet Blythe could get me to say these things too, if she had her hand up my keister.
not hatin, just sayin'...
Much dap to Tyler for posting this. If this is the kind of argument that is supposed to spook me out of silver, I may just sleep even better than I do right now.
I wonder when Tyler accepts his Pulitzer(s) if he will thank the Trolls.
Newsboy - Sorry, I junked accidentally as I was clicking first then the page appeared. No junk intended for you.
As to the author,
"What is held down, must come up"
plus, fiat dollars have gone parabolic.
Those are two distinct reasons for silvers corrective pricing you now see, and add to that the WORLWIDE demand.
You still have time to protect yourself.
*
Glad to see this author on the other side of the trade along with all other traders. Here, I will make this simple: no one was long silver. No one is long physical silver. No major investor, no hedge fund, no one. Everyone is (and for that matter, has been) going to try and sell silver. What will you use as the asset? Some bullsh*t ETF that holds the right for a cash payment on delivery. People will never understand this trade I guess, even while it stares them in the face. Fine, take the other side. Delay the inevitable, see if I care.
To conclude, silver is monie, and monie can not be shorted, as it is the underlying asset. You use monie as the asset. Finance is involved in a lie, a paradigm created into existance with lies. Logic will not be defied, even if it is veiled. The truth is absolute. People can only question it. Truth unveils reality. Short that.
And to note, yes, silver is also, along with being real and absilute monie by definition, a commodity. It is a direct investment into technology. If you short technology, then you short input costs. If you short input costs, you short a fundamental growth asset. If you short growth, then you short the system. This, but the system was already shorted to the extreme during the Fall of '08. Where was the PWG during the Fall? Shorting silver. They already made the pullback. They already pulled the system back. They do not need, nor can they, do it again. The dollar is too weak. The fiat ponzi is too weak. For crying out loud, the fiat ponzi is dead, and has been since the Fall.
Thanks for the simplicity and elegance.
Cue the trolls
Money can indeed be shorted. Even if we all agree that silver is money I can sell you a contract to deliver x amount of silver in y amount of days. If you are willing to pay 50 grams of silver now to get 55 grams of silver in y time period and i use it to buy something that appreciates or loan it to someone at a higher rate of interest ( now measured in grams of silver), then i could make or lose money when it is time to give you what i owe you.
We have just invented debt and the.carry trade.
Hey oog. I gotta proposal for ya.
"Be scared, be scared, listen to me, get out of silver now, for your own good! I'm only saying this because I have your best interests at heart, not because I'm getting killed holding these shorts, not because silver is chasing it's historic 20:1 ratio to gold ($75 about now), not because all the silver stockpiles are now used up, not because the JP Morgan suppression has been completely overpowered. No, I just don't ever want to see you get hurt."
He he newsboy.
You probably didnt have pubes when i started playing silver.
You can play in a mania, I cashed out. Maybe a bit early, but i like cheap, unloved shit like back when silver was between 6 and 15.
You ever heard of picking up pennies in front of a locomotive? Buying silver without a hedge now may be similar, but you wont hear this choo choo train before it smashes you. Newfangled choo choo stealth technology.
I dont buy lottery tickets.
Topcallingtroll,
I am also old enough to remember the silver and gold mania of 1979/1980.
Guess what? It's not 1980 anymore. In a multitude of ways.
Generals preparing to fight the last war generally lose the current war.
You probably that whole interwebz thing was a fad too....
interwhut?
Sphincter said whut...
The long term fundamentals for silver are almost unbelievably bullish.
The current silver price is around 1.75X the 200dma, an unprecedented reading (for this current bull...I haven't looked further back than 2003).
Previous uplegs have collapsed into major corrections at an average of less than 1.5X. The most extreme reading before now is about 1.65X.
Maybe it really is different this time. You can certainly make the argument from a monetary perspective.
Nevertheless, I think it likely a 20%+ plus correction is probably coming pretty soon.
It's all academic to me because I'm not certain there will be any physical silver to buy at the corrected price, and that means I'm not changing anything (except trading some silver for gold).
It is possible to be right about fundamentals and completely miss short term moves because silver's price hasn't yet reflected all those fundamentals and truly shouldn't go down.
But there's still the psychological component. We've seen new money, new investors buy into this upleg and most of those don't have the knowledge of the fundamentals that many here do. They are not strong hands....yet. They'll join us on the next upleg with greater understanding and stronger hands, but many are about to get their first taste of the exquisite pain mistress silver loves to dish out from time to time.
No matter....it won't last long.
I think you are exactly right, and would only quibble that if indeed silver does take even a 20% fall anytime soon, there will be essentially NO physical silver available at that time, given the already current tightness in supply. This is especially significant as previously we only saw physical supply constraints in late 2008, after silver's monstrous price plunge, whereas today we are seeing tightness in supply during an unprecedented runup in the price, and at near-historic highs. Who here really doubts, if silver were to take a plunge anywhere on the order of the one in late 2008, that supply would utterly dry up, and that premiums on what little might still be available would skyrocket to 50 or even 100%?
In a nutshell, the point I am trying to make is that should there be ANY significant decline in the price of silver going forward, much less a major decline, it is effectively NOT going to be a "buying opportunity" for almost anyone, as physical silver will either simply not be available, or else it will be available only at unprecedentedly high premiums which will negate the so-called "advantage" of that relatively low spot price.
I sold a few ounces of silver yesterday and the dealers were happy to see me... they had sold all their silver. One called it "panic buying" ... people afraid of what was happening to their paper money, to the economy. I'm considering selling 100 ounces just to have some fiat in the case of a dip.
2008 was an incredible eye-opener for me. I bought on the way down at about $10.87 and the best I could do was $13.25. That was for big, ugly, bread-loaf industrial silver. I could have done better if I'd been willing to wait 8 weeks for delivery...but I don't play that particular game. I want my silver when it's paid for. We don't have quite the variety of choices in vendors in Australia that US and Canadian buyers do either so premiums tend to be a little bit higher on average. Still, $3.00 (+) per ounce for industrial silver was ....whew... hurt at the time but obviously I don't regret it now :).
I expect premiums will be much higher on this next iteration...IF you can find lots of more than a few ounces at all. Your point about tightness at current prices and what that implies for supply in a future correction is something that should be considered long and hard by anyone thinking about selling any physical right now.
I can't see myself selling any metal ever again for currency. I'm trading the ratio with physical metals and if I get that wrong, I'm "stuck" with gold :) Poor me... :)
I'll bet that loaf doesn't look so ugly now.
be utch be trip pin'.
Rampant?
What about US$ 200T debt instead of 13,5
HaHAHAHAha. The big lie.
And you worry about silver?
http://fellowshipofminds.wordpress.com/2010/10/29/economist-says-real-us...