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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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I was a registered commodity broker during the run up in Gold (starting around Dec. 1979) and Silver through the entire run-up and through the Hunt Margin Call's and for another 20 years after.
I witnessed moves in Silver in the $5 per ounce range per day and some $5 limit-up, and limit-down days.
And, when, not if, it breaks above $ 52 you will see at least these type of moves again. When the market really heats up, and it will, these will seem like the good old stable days.
I also worked closely with the Internet companies from the early 1990's right through the peak in late 2000 and beyond trading these stocks,and know the feeling well, $ 10, 20, 30 dollar moves in a day.
I had people in Qualcomm from near $40 all the way to it's peak at a split adjusted $ 800 . Whats coming in my view are these types of moves in various markets including the metals.
You are crying "wolf" far too soon. The feeling is just not anywhere near there, yet.
I could be wrong, but I doubt-it.
I've seen too much, in the ring of the hot spec markets to buy this view,.....yet.
Thanks for the perspective of long experience.
She's a shill for JPM. I hope it does go down to $40 so I can invest the money I'm holding back for this very purpose.
Groupthink always kicks you in the balls, folks.
When this short squeeze is over, a 20% drop will be wishful thinking.
The only "panic" I would feel regarding a 20% correction would be getting to my local coin shop before anyone else.
Why would the price of a single commodity bring the markets crashing down? Would a bumper crop in cocoa crash the market? Do you see the price of oil falling by 20% any time soon? I think you should focus on the economic collapse of Japan, the second largest economy in the world is gone. That will have a bigger effect in stock prices.
+1
If there is a market wide downturn I can easily see PM's getting wacked for 20% - 30%...and a market wide correction would signal that something OUTSIDE the PM market has either been turned off ( FED ) or yet another Black Swan has reared it's ugly head at the worst possible time. At which piont the Fed will have all the popular and political will it needs to crank QE3 into high gear; then back up the truck and start buying silver, gold, etc. cause it's off to the races...
Could Blythe gimme a 20% correction to allow me to BTFD? I'd offer a mind blowing orgasm in return (with huge magnum size silver dildo of course)
This link offers better arguments than the posted write up. But then again, this link is pro silver. I'm just saying from a debate point of view....http://republicbroadcasting.org/?p=14870
IF QE2 stops, and QE3 is reportedly not considered, the stock, commodity markets will correct. When bottomed, use both hands to buy gold and silver
If one uses gold as an reference point it is trading well over its highs so silver has a long way to go still. For me that speaks directly to the suppression of the price. Silver should be well past its historic highs by now.
I don't trust paper. I've been waiting for some time for silver to have a big-time dip. If I see a 20% drop, I'm backing up the truck.
Geologically speaking, there is 15x more silver in the ground than gold. At $1500 gold currency, that puts the correct value of silver currency at $100 per oz.
Look at the value of platinum. So far it's price behaves more like a precious metal, relatively devoid of the currency substitution to its price.
platium seems to be stable in price and it's solid, it might be the best hedge long term
Silver is consumed by various industries, Gold not so much.
Well, I could take this all more seriously if: you knew how to spell (bizzerk? please.)And while I don't mind reading the other side of the argument, I think your fundamental understanding of the current market is missing a view of who the key players are. JPBanfrauds and Co have been trying to squash this market for three months. It ain't (ok, ok) working because even institutions are getting the hang of the fact that bankers are no longer reputable managers of other people's risk or money. I get better results from my coin dealer. John Q is onto the bastards, and they are the ones due for a crash, not metal (yet).
http://www.urbandictionary.com/define.php?term=bizzerk
Methinks someone is long silver and is talking their book. They say, Silver IS A Screaming Short! which is hard to believe.
So, if not PMs, where should I be putting my shrinking $$? GM? CDs? Real estate? Netflix? Does ammo appreciate? Someone help me!!
Gold is safe for now...Ag is running too fast...
25% PMs, 50/50 Au/Ag
20% Junior Mining cos. (and a few good seniors) SWC, AUY etc...
20% Energy, oil + gas trusts and the like. PBT, HGT
20% Convertable preferreds in the Energy/Resource sector CHK, HL, EP, MPP
15% Cash (to be ready for any dips)
Edit: Convertable category should include Energy infrastructure MLPs, but watch their leverage
I remember in late 2006, I was at the grocery store and a cashier slipped a business card into my grocery bag. It was of course her real estate card. You know how that turned out! Yesteday, I was at my sisters house, and she was trying to sell me on a new MLM business. What was it?
Silver, bitchez!
I have been a buyer for over 5 years. I just may hold off at these levels for a few months. I firmly believe that silver is destined for $150/oz, but not with the likes of MLM companies on it's coat tails. Silver just may shake out some longs before heading further up, and a 20 percent drop would do the deed nicely. It's not like it hasn't ever happened before. Everyone likes to make fun of the straight line the equities markets are following, but when it comes their PM, it's hands off.
I'd like to know how that MLM would work. Not that I'm interested in doing one I just want to know how it would operate. There was something similar on ebay for a while to buy and get a free silver round as long as you send people to buy more to a central source. Wonder if that is the same one you are referring to.
How would it work? My wife has a friend who decided it was a good idea to sell bottled acai juice. The poor woman has a stack of unsold cases in her garage, and the guys that sold the concept to her are still laughing.
Thats a good idea, cash my silver into .... fiat? The only place to put it would be gold.
One of the reasons PMs are doing well is money knows that the SHTF at some stage in a very big way and the result of that will be totally unpredictable. But we do know the USD is sailing off a cliff unless they do something and that something will shoot hole in the head of the economy and crash markets, leave the govt insolvent unless it cust spending in such a way that would also trash the economy. The US economy will become an even greater basket case and the USD ultimately still not worth a dime.
The future is far too uncertain to be all in fiat and not in PMs.
If you think it is going to take a dive, sell then buy back in.
But I just wonder if the recent run up in silver in addition to short covering is people getting more nervous about the ME and US economy seeing the end game getting too close. AND if things getting even more scary then silver will continue its march, and gold too.
The problem with parabolas is small divisions of time contain ever increasing values. You cold be selling silver at the begining of a parabolic move, half way up or....
But the only reason for a sell off would be the sentiment of it being over bought, all the other fundamentals are pushing it up. They wont be able to stop the parabola they way they did this time, it will have to be pure market initiated sentiment that offers good alternatives.
So yes the market could sell off dues to a sentiment of being over bought, but it will be short and sharp and the upward march would continue for the same reasons as now.
We should also remember that we are just starting down the inflation curve. Once a gov't starts printing currency it takes about two years to start seeing the resultant inflation. Unless something happens to the dollar (collapse or Ben unprints a few trillion) then most real assets will continue to go up in price and we are just at the start of that cycle (see SGS inflation report). There may be corrections but the overall direction will be up.
This is a 'clown article'.
No solid back up info other than the hysteria of
'prices are rising too fast! Prices are rising too fast!'.
I'm not saying silver couldn't correct downwards (although I believe most of this upwards price move is from that analogy of a beach ball being held underwater)
But this article is just 'vapor'.
20 % drop
takes silver back to 40 $
i'm so scared ....
"markets can be "wrong" for extended periods of time" The market is never wrong. It can be manipulated but its never wrong, and manipulation can only last so long
How is a market manipulated? If the market is never wrong, then it is never wrong. You can't have it both ways.
Was the stock market manipulated in 1999?
Was the housing market manipulated in 2006?
They were markets that happened.
Underlying conditions caused those markets to do what they did.
You can't have it both ways.
Can stocks be "overvalued". Yes.
Can silver be "overvalued". Yes.
If the market is always right, why do you all want to buy on the dips? If the market is going down, why the fuck do you buy?
It is because then you say that the market is wrong!!! And YOU are right!!!!!
Jeez,
gh
But yes you can have it both ways, kind sir.
Couldn't a market can be manipulated and at the same time you be ignorant of the fact?
The market is always right. Even if you, the observer, don't know exactly why that is.
"wrong" for extended periods of time"
Try again, skippy
Is your low IQ due to your mother dropping you too many times or inbreeding? Try reading his post again. It says over the long term.
Jeez,
st
We have a winner folks! Milestones
One problem with the article: if you crash the price of silver; there are still lots and lots of people waiting to come in and "back up the truck." The silver bugs are not going to go away just because the price jumps around 20%. People (most) are buying physical because they don't trust the dollar, not because they want to get rich quick making a commodities play (well some are). There is supply and demand for everything including the dollar, currently there is way more supply than demand for the dollar; it just seems taboo to publicly speak such things. Purdy, shiny silver is far more appealing to me at this time than lame diluted dollars.
Go ahead and crash the price of silver; myself and like minded others will simply BTFD and run it right back up again. You can't just shoo the silver crowd away like you could a couple years ago, the rules are different and so are the motives for being in the game.
So, the economy crashes. What are you going to do with your silver?
You will sell it.
Do you really believe that you will barter?
You will cash your silver in for an easily useable piece of paper.
I have thought of filling up my gas tank and offering the attendant an oz. of silver, but I know they would just think me crazy, and I would have to get out my debit card and pay for the gasoline or risk being arrested. That is the reality and I am quite sure it wil be the reality for many years to come.
gh
Im sure you're a fucking idiot.
There's a lot of room between a booming economy and barter-based Armageddon, friend. Why are you assuming that silver-philes are buying because they believe the world is coming to an end?
The litany of crap the world's economies are dealing with right now is more than enough to justify "high" PM prices. The truth is that the central banks will continue to pull rabbits out of hats, ad nauseam, and keep their particular game going for ever and ever, amen. The difference is that the perception of the value of diversifying into PMs has changed irrevocably, as a result of the endless CB vomit.
Until there is clear evidence that healthy, sustainable economic growth is returning (please tell me what you see that will be bringing that about, 'cause I don't) the status quo will continue.
Are you really that stupid? Nobody said that all fiat currency will disappear completely from the world. It could be revalued overnight or we could see crushing inflation like Zimbabwe.
Using your scenario of the economy crashing, how would you be able to use your credit or debit card when there's a banking holiday or your bank shuts down?
Gold and silver can be traded for any currency in the world and will never be worthless. You could go to Vietnam or Poland and trade your gold or silver for the local currency and buy anything you need. Can you still trade in your German Reichsmark or Soviet Ruble for local currencies in order to buy food? Many currencies have become worthless, but how many precious metals have become worthless?
Sellstop is clearly still so trapped in the fiat mindset and paradigm that he cannot yet recognize that it is possible to directly trade value for value without the intermediate of a fiat currency to act as the numeraire, but by having the metals themselves act as such.
everybody wants my Panda!
I'm in that bidness. If you ever find your way to one of my stores, your silver will be more than welcoome as a medium of exchange for my gasoline.
sometimes being sure don't make it so. !! circle jerk.
the fed is a cirle jerk as is their note. what they care
about is loading up their ballance sheet with fraudulent
securities to protect the guilty and diluting the value of
their notes in the process. all to sustain the illusion of
a functioning money system that has become debt saturated and
has reached the point of no return. they can't stop printing
without collapsing the securities prices. bad paper baby and
it is a circle jerk and we are all in for the ride.
i will buy silver till i can't no more, no mo.
silver . !! u should 2
Sure it might not work for everyone but for myself, I know enough like minded individuals we already buy sell and trade in cash OR gold, silver, Platinum. it is simply another exchange medium for us. A decent used motorcycle will go for $1600 cash or 1 Buffalo. A rifle for a roll of ASE's. A generator for a Platinum Eagle...etc.
The people I associate with have already moved beyond the "talkin about it" phase. It is liberating being able to conduct high value transactions privately with a few coins/rounds/bars/nuggets and no interference from busy-body bankers. We've decided making our own private financial reality is far more advantageous than playing by rules established from the outset to bleed us dry. Your mileage may vary, DYODD.
I will occasionally offer silver or gold as payment, and occasionally it is accepted.
i blame max
one month delivery time for phisical silver. where is the demand destruction? it's insane but people want phisical even at these prices. when delivery time goes down to two weeks, it might be time to worry
The questions is, when will overheating commodity markets force the Fed to stop the PIMP (Progressively Insane Monetary Policy)?
The Fed doesn't care about the price of "precious" metals.
The probably pay attention to the relative value of the US$ to other currencies, because that is what the world economy uses to function.
The Fed doesn't care about the price of "precious" metals.
The probably pay attention to the relative value of the US$ to other currencies, because that is what the world economy uses to function.
Just because they feign ignorance doesn't mean they aren't trying to prevent the use of PMs as the defacto monetary system. They are aware of it and will not acknowledge it until it's too late. This wouldn't be the first time they "miscalculated" or "underestimated" or had "unintened consequences" when in reality they couldn't give a damn either way as long as they maintain their own power and control.