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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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In the game of extend and pretend much of what she says makes sense. Long term silver is not overvalued but the dollar is dying NOW not long term. Killing the PM market would seem like a desirable goal for the bad guys short term. A 20% drop is conservative, historically speaking, at least top to bottom. All you people with heavy physical positions should think about taking a bit of your profits and hedging with paper. SLV $30 puts for June only run 10 cents and you can take any paper profits from that and buy more low priced physical. The question of contagion is one I've not seen before. Is there a realistic likelihood that the bottom dropping out of the silver market can tank the whole machine???
TD:
Do you just post this nonsense to bait us? This woman is ALWAYS clueless when she writes about metals. Including this bunk is even worse than "100% FREE SPECIAL REPORT" Graham Summers and his mastery of the obvious - at least the ideas he parrots are CORRECT.
Silver, bitch.
Let's be consistent, please. People have been pointing out the Morgue's massive short position in Silver for months (years?). So, WTF, this has to be the Morgue covering their shorts. The real problem is, once they stop their massive buyback program, and clean up the floor from their massive poop, the upward pressure on the price is going to disappear and the price will correct. They may even try to push it down with more shorts. Let's hope they do - a great physical buying opportunity! Can somebody point out the flaws in this reasoning...
The only flaw is that now the cat is out of the bag on manipulation (Maguire, Bart Chilton) there is no reason for the re-monetisation of silver to slow until (at least) historical silver/gold ratios are achieved.
In support of this, witness gold's recent underperformance as long term physical portfolios are re-balanced with "the poor man's gold"...at about 15:1 I expect gold will start to again be the main barometer of political fiat profligacy, and silver will bounce around.
The flaw in Dian Chu's analysis is that he, like many others, is looking at price action only. The question Dian should focus on is "how quickly should the ratio reset now that the long-suspected manipulation in the silver market has been confirmed?" Hint, overnight would be OK with me.
+2 blings
Well, there are two sides to every market. Silver longs should be delighted there are those willing to sell to them (preferably on margin)... And hearing the other side of the "argument" never hurts.
"And hearing the other side of the "argument" never hurts."
I disagree. Listening to the drivel as supplied by Spalding Smailes and his boy wonder side-kick, Topcalling Troll, always hurts! Painful bedfellows. (I suppose their utterings really can't be graced with the descriptive, "argument". The term best used for their less-than-substantive posts would probably be "baiting".) When the other side of the "argument" is thoughtfully, intellectually and intelligently presented, it is always gratefully investigated.If the counterargument is weak it should merely solidify your resolve. And remember Paulson was not out there blasting to everyone he was short subprime. He was accumulating a bet. And he ended up being right. For those who are convinced in their PM argument the longer there is a counter thesis th better.
Right on, TD.
If you remember why your long silver (and hopefully it's a little deeper than, "cuz it's a purdy chart") you can read something like this and see what pieces of the story are missing.
It is getting to be a bit of a personality cult...
Or maybe the majority is right!!!
I concur. Any sane analysis of silver fundamentals indicates it is woefully underpriced. That doesn't imply we won't have a dramatic correction as sanity left the markets long ago.
It's a catch 22 if TPTB drive silver down as it will deplete the physical available, thus inviting a steeper curve on the next run up.
Perversely I hope for a plunge in the price then I could purchase more coins with my limited fiat resources then just wait as it will go back up as the dollar becomes less useful than Scott two ply tissue on roles
Agreed on the other side of the argument. The other thing to take away is she warns against leveraged longs. As I emply leverage and am long, she raises the right concern. If a correction comes (markets dont go straight up), leveraged longs need to be cognizant of risk.
@TD
the other side of the argument?
are you kidding me? lady chu is a fuckin' idiot. she isn't qualified to pick strawberries in pudong. she shouldn't be within a fifty mile radius of a keyboard until she learns what a real parabolic move is. the other side of the argument is that jp morgan or some other mafiosio is going to slam the silver market down to shake out all the weak hands.
CW
The other side of the argument is often presented by a @#!?*! idiot. Half my conversations would never take place if they were with such a person. PS: The same type of people are running the fed and gubberment, notwithstanding that some are also inherently evil.
I stopped reading at "In other words, if Silver gets a 10% down day, which it almost will for sure" (emphasis added).
No such thing as certainty in the investment world.
p.s. just wait until the HNW investors - not the big banks who will get bailed out - look for the exits of this Keynesian fiat experiment. That will be parabolic.
She has a reasonable argument that comes from a conventional perspective. I hope many people with similar traditional market conforming minds continue to feel the same. They provide the fonts of opportunity from which we may dip to quench our thirst. I heard Earl Nightengale once say "It matters not how high up or how low down you are, what matters is the direction in which you are tending".
Indeed. Center-thinkers are such a hoot! Always in denial of reality, and blind to the obvious. I love to see them suffer at the hands of us "tinfoil hat wearers" and "conspiracy theorists", which they ALWAYS do in the end. I have no patience with, nor any sympathy for, those who refuse to use their minds and look beyond their status-quo, inside-the-box programming.
Hey Dian,
What is money?
FED cotton with serial numbers that go into the trillions?
Aristotle thought about this in the 4th century BCE and arrived at the five characteristics of a good money:
Silver is durable: It doesn't rot
Divisible: Check
Convenient: there is less silver than gold left. So 100dollar silver coins would easely fit in your wallet. And how many 100 bills do you carry in your wallet on a average day?
Consistent: 1 SILVER OUNCE BITCHEZ!!
How can anyone call a 100$ bill consistent? THEY PRINT TRILLIONS OF THEM EXTRA EVERY YEAR!
You can't eat silver but would you eat a 100$ bill? It's proven that dollar bills have more germs on them than there are people on the world! Silver is ANTIBACTERIAL! I rather stick a silver bullion in my mouth than a dollar bill.
Silver has intrensic value
What's the intrensic value of a 100$ bill? The cotton it is printed on?
Of the 92 naturally occurring elements, gold and silver has proved to be the best money. It’s not magic or superstition, any more than it is for iron to be best for building bridges and aluminum for building airplanes.
There’s much more that can be said on this topic, and it’s important to grasp the essentials in order to understand the controversy about whether or not silver is in a bubble. But this isn’t the place for an extended explanation.
Keep these things in mind, though, as you listen to the current blather from talking heads about where silver is going. Most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF or a similar institution with an interest in the status quo of the last few generations. You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.
So let’s take some recent statements, assertions and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.
SO FOR EVERY "TECHNICAL ANALYSIS", THERE SHOULD BE A LINKED CHART TO IT SHOWING THE MONEY SUPPLY! AND IT WILL SHOW SILVER IS DIRTY CHEAP AND SHOULD COST 10 TIMES MORE!
At least...
SO ECONOMATTERS: IF SILVER GOES TO 50$ IN THE COMMING 2 WEEKS = YOU SHOULD QUIT YOUR DAY JOB! YOU SUCK AT IT!
"How can anyone call a 100$ bill consistent? THEY PRINT TRILLIONS OF THEM EXTRA EVERY YEAR!"
...and don't forget that Russia and Iran are helping out by printing billions more each month.
+1 to the angry Belgium waffle
+2 for the one-liner
sounds like if someone is talking their book.... If there's a bubble anywhere, it's at the U S Treasury, perhaps someone should raise their margins.....
PS thanks for the easy math....
The day that buying 1 silver ounce costs so much that I would need to talk it over with the misses, will be the day that I call it a bubble.
Today, filling up my car still costs more than 3 silver ounce per week.
1 lunch costs about 1 silver eagle
1 bottle of good Whiskey costs more than 2 silver eagles
My cell phone bill is higher than 5 ounces of silver every month
My subscription to the gym costs about 1 1/5 silver eagles per month sauna and massages not included.
...
For me that still shows silver is cheap and not even a luxery product.
I got two words for you, SD.
TACO BELL
A week and a half's lunches.
And a meat free meal as well. They don't clean Taco Bells, they tear them down and rebuild.
You bunch of gluttonous gourmands. I can eat all three meals all seven days for the price of a silver eagle. Of course, I have to do the cooking...
Lunch = 1 silver eagle? live it up, dude!
Foods a bit more expensive in Europe than in America dude :)
1 simple pasta: 20 euro
1 steak : 27 euro (sidedish + 5 euro)
2 glasses of wine to go with it: 11 euro
1 ounce of silver: 32 euro
I never lunch in Mcdonalds or at a student restaurant :)
Yeah... but tax and gratuity is included. Typically, the lunch is a hell of a lot better. Try getting a real lunch in Manhattan or Chicago... basically the same price, and no, a pannini or slice of pizza is not a fair comparison...
It depends on what you want to eat. I can get a good steak lunch with 2 sides and a drink for less than $20
Raise margin requirements on silver futures? Does this writer not realize that CME has already raised silver margin rates four times in a matter of weeks?
This article completely ignores the silver backstory. JPM and others are massively short silver, the shark funds are circling, and both the US Mint and the RCM have run out of silver and suspended production of Silver Eagles and Silver Maples.
Is silver "overheated"? I don't know how you take the temperature of a commodity futures contract, but it certainly looks overbought to me. Overbought can stay Overbought for a very long time, such as the Treasury complex.
A 20% crash in silver will topple the whole commodities complex and trigger Armageddon? Well, maybe. But silver took an Acapulco cliff dive from $20 to $8-something two years ago. Now it's above $40, and everything else is up with it to varying degrees.
I'll paraphrase Benn Steil of the CFR: "I don't think it's the beginning of a silver bubble. I think it's the end of a fiat currency bubble."
Max Keiser talks silver.
http://www.silverbearcafe.com/private/04.11/crashing.html
Silver bubble, not yet, not until the guy shining your shoes on the street is talking about silver
The dollar looks horrible here. Those FFT guys have been crushing the market latetly. I am a VIP member and love their technical analysis, but they just uploaded a FREE video of what they think is going to happen in the next few weeks to the S&P 500. Its well worth a watch!
==> http://www.youtube.com/watch?v=Lnt5HuGGcKw
When he pulls out a silver eagle, the top will be in - talking about it this time around will be meaningless.
Well said.
There is only one way to stop dangerous speculation in commodities: Raise the (fucking) interest rate, and save the (fucking) dollar. (Pardon my french).
Anything else is just rearranging deck chairs on the Titanic.
Raise the interest rate?
By what measure are you basing your proposal upon? Surely you have a basis other than just saving the dollar?
Dollars are debt instruments. As a measure against income, the debt level is 96% of GDP (using 2010 figures). The debt burden is now $14.4 Trillion. The interest payments on that amout to $450 Billion (give or take). The government goes further into debt, beyond its income stream, by a further $1 Trillion each year.
This increase of debt will eventually equal the total (100%) national output. The interest payments are by then unsustainable. Raising the interest rates on debt payments will add to the burden, thereby making the possibility of paying the debt principal off problematic.
The credit rating will then be downgraded and the death spiral ensues. It's beyond austerity as a tool in an economic sense. Austerity will be thrust upon us.
Raising interest will only exacerbate the problem, at this stage.
http://en.wikipedia.org/wiki/United_States_public_debt
Well said!
raise rates and save the dollar? Those 2 don't mix right now.
Raising the rates would cause interest payments on the debt to become so high, it would double the deficit.
Trillions would need to be printed above the trillions that are planned to be printed
so: bye bye dollar.
Raising the rates with 1 point is enough to kill the dollar right now.
Austerity first, rasising taxes second and MAYBE you can save the dollar in the process.
There just isn't a simple sollution. Anything that doesn't hurt isn't a sollution.
Inflation hurts but it's not a solution. The only real solution is spending cuts.
No. There is no solution but repudiation through default or hyper-inflation.
We cannot cut $1.4 trillion from the annual deficit without a collapse of the economy. It's too late. The die is cast.
+ 14.7 trillion
Buy real assets
You put it so succinctly.
Uh, does anyone have any other solutions?
Please... anyone?
Instead of the race to the bottom with fiat devaluation, at least compete in the race to attract capital and jobs, instead of driving them away.
As long as the architect of US fiscal policy displays less intellectual capacity than the chimp that etrade used to use in its commercials, then there cannot be an effective synergy of monetary and fiscal policies, and the US is screwed.
"Uh, does anyone have any other solutions?"
Save yourself and loved ones. Stop playing the paper silver markets, and get into bullion asap. Don't sell, smile as corrections come and go until the Au/Ag ratio hits 14 then sell whatever % is feasible to your condition at the time. Head into the future without counter-party risk. Rather than sniffing around Comex and lamenting their chicanery, go to the garden and plant a lemon tree, renew your passport, play with your kids... you know the drill.
Nice post.
The answer is simple really: Slash military spending by at least half (although no one has the guts to do it. If they did, Social Security wouldn't be a target. [and please don't come at me with the 'wasteful welfare' argument about SS. Hundreds of millions of us paid taxes into that program for decades and both repubs and Dems looted it repeatedly]. The congress people aren't simply thieves and liars; they are people without integrity, courage, fortitude, respect for life and the ability and desire to actually represent us. I always tell the politicians, when they're not off on a junket, pursuing underage kids or hauling in the dough from special interests, that I don't want their 'leadership'. Representation will do fine. What folks are finally beginning to understand is that they (the elites) want it all and will do anything to get it. If anyone had told me five years ago what was going to happen in the next five years, I would have said, 'Impossible'; but hey, here we are: The deadman's dead-end.
Manthong
Solutions? Get out of debt. Don't assume your job will be there in 12 months. Stock up on groceries, the non-perishable kind. Too bad Mountain House, the premier freeze dried food maker, is all sold out and not taking order for the next 3 months (this is another dead canary in the mine shaft by the way - http://www.mountainhouse.com/). Buy anything elses that everyone needs or will not available when the dollar is trashed. Get some lead too - 40 cal or 223. 22 likewise is good barter.
Long positions in Au, Ag and Pb sound like a good idea.
It seems like a position in TP to hedge SHTF might be prudent, too.