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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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Yes, like I said: Austerity and raising taxes.
Bite the bullet.
Hyperinflation isn't exactly a nice thing. He who has nothing will be totally fucked, those who do have things will just make it, and those who are rich will have saved enough outside the system which they can bring back in and use to buy up the system.
If hyperinflation should happen, everybody will lose everything and everything will be bought by less than 1000 people who will end up owning everything.
+ 100
No to austerity. I did not create the debt. I did not benefit from the debt. I do not recognize the debt as valid. Why does a sovereign country borrow its own currency from private corporations with interest?
Cut the bureaucracy, wars, etc., etc. Yes. But it will still collapse the ponzi...
I agree that is absolutely what we should do.
But I'm pretty sure we'll face the horrors of hyperinflation because Americans can't stand the pain of a bruised ego.
Plus austerity sounds so.....austere.
And riots sound so...riotous.
The home folks aren't in the mood for austerity, not after banksters paid themselves huge bonuses with free Fed credit. "Austerity for thee, but not for me." I think not.
You might sell austerity to the unwashed if you first put half of Wall Street in prison, and shot the other half.
Yeah, with justice AWOL, fuck austerity.
You are assuming those 1000 will live long enough to enjoy it.
Salvation through submission?
Sounds Islamic to me.
That did not come out just right... maybe “salvation through submission and deprivation?” fits better.
But somehow I am just not right with having to pay more taxes and be austere for stuff that is not my fault and did not benefit me.
Regardless, no amount of austerity save eliminating 50% of the federal and state and local government and entitlement structure will save us from a realignment of epic proportions.
My only worry is about what kind of government will emerge from the ruins.
Hopefully a completely fascist one will emerge. One, where there is no Congress, no lobbyist and no corptocracy. One where banks are seized and people who have been paying their mortgage get an upgraded house with no extra cost, and the people not paying get a substantial downgrade. Hopefully, our new leader could bring home the army to work on infastructure and create an infastructure work program for the unemployed. And finally, our fascist leader raises taxes so high on the rich their heads blow-up, leaving us with all their property.
PS- for everybody worried about rich people leaving due to high taxes. Let them. They can't take their property with them! I would love a landscaped, 8 bedroom house with hot-tub and pool for pennies on the dollar!
Um.. I don't think that worked out too well last time it was tried in 1936.
Property and values in Berlin, Frankfurt and Dresden tanked (literally). I would not welcome a fascist dictator. However, a little Robespierre despotism of liberty in New York and Washington would be refreshing.
be careful what you wish for. the u.s. is not what it once was but many in the rest of the world are still breaking laws and braving deprivation and death to get here.
Boy, are they in for a surprise. It's going to pretty hard to make it in the brave, new USA if you are not a thief, drug dealer, pimp, hooker, union boss or politician.
Oops, I forgot investment banker.
Yes, but they didn't even have refrigeration back then. There is no comparison to 1936 Germany and 2011 USA.
I think Econmatters is having huge losses on his silver puts and the repo guy is intimidating him a bit to much.
The real question is: WILL THE REPO GUY TAKE AWAY HIS COMPUTER YES OR NO?
never the less, when they cut his electricity he'll be off the air anyway :)
Raising margin requirements CONFIRMS the upward bias in price. Silver is not a trading story it is a delivery/supply story. Before wasting time writing an argument that tells people to short something, try reading a little about the fundamental story first.
(and assuming silver "corrects" what then? It will move straight up.)
Lobe-tingling comment. Well done.
I also think the writter doesnt get the point that there is not enough physical arround and the CME actually helped to manipulate the price downwards in the past.
What would happen if they let silver go up to lets say $80 and then raise margins to 100%. All those speculators would easily jump out at once then and the price would drop like a rock.
Is there any new information out there that was not there 2 months ago?
yeah lucky I see the same things you do
no doubt silver is due for a healthy correction
but yes, there is some information you are not factoring in
look at that chart again; notice where the price really starts moving in Sept?
coincidentally, that's exactly when JPM made a public statement that they were closing out their short silver position, some or all/ who knows
I'm pretty sure we're in uncharted territory here 0_0
It’s not the same as back when stupidity and greed were our only problems. Now we have insanity to contend with and likely power lust as well.
I stopped by a local coin shop this (holiday Saturday) and cleaned him out of the only 4 raggy Englehard 10z silver he had for $ 490.00 ea and the only two gold Eagles he had (PCGS MS69 - I could care less about the grading) for $ 1562.00 each.
I took them home and set one of the 10 oz bars next to a 100 oz Englehard bar I bought in the ‘90’s for the same price and set one of the PCGS Eagles next to a Eagle I bought back then for under $400.00 and asked myself why the hell did I do that?
Then I thought of Ben Bernanke, Timothy Geithner, Barack Obama, Goldman Sachs, et al.
If PM's pull back 10, 20 or 30 per cent, I'll just buy more.
If you think about these guys much longer, you will go out and buy several hundred maple leafs regardless of price--I did a while back.
I hope you are talking about Silver maple leafs. If not, and you are talking GOLD maples, then I'd like to apply for a job as your chauffeur!
YOu guys are all talking your book,
Is there any new information out there that was not there 2 months ago?
In my estimation , not really. It has gone parabolic.
It has good reasons to be high... just not good reasons to go up 5%/day.
It is that 4%/day that it will have to give up to come back to a rational market.
I am short at 46.4. if it goes up more than 50c sunday night I will be out,
To try again at 52, Eventually it will have a 5-7 dollar down day.
The only way to hit it is to be in, and to be in you have to pay the dues.
Nobody will get the chance to short at the top when it starts.
There... that is what talking your book is all about !!
Just because there is no new information that you or I don't know does not mean is not new information. It could be that a few market participants are aware of new information that is not yet publicly known, the value of information. Either there has been criminal activity in suppressing the silver market for years, and it's now just bubbling to the surface because extraordinary monetary accommodation, or speculation is driving up prices. Sure speculation will statistically account for a significant portion of the silver price but the gold/silver ratio is no where near the historical average by any means! Such a diversion from the historical average blatantly suggests that the silver price has been suppress. This wouldn't be all that surprising considering bankers or paper pushers hate it more than gold. It is harder to control the supply. No one can predict the future with 100% accuracy consistently;however, that being said the overall uptrend will continue and whatever tree path there is to say differently is getting smaller each day. Soon enough that tree path will no longer exist.
The market doesn't need to explain its actions--short it if you want. The problem is that with JPM short more than 100k contracts, any forced short covering will blow the price sky high.
Prémarket is 47,38$ right now. Opening might be at 49$ to 49,5$
WHAT WILL YOU DO?
WHAT WILL YOU DO?!
Option 1 : Scream and run arround in circles
Option 2 : Scream and run arround in cricles
Try again at 52$? WITH WHAT MONEY?! YOU'LL BE CLEANED OUT WHEN THE MARKETS OPEN!
Yep--being on the wrong side of the silver futures is a stone-cold bitch!
"Is there any new information out there that was not there 2 months ago?"
Yeah, there is. Goldman Sachs just added SLV to it's "Hard To Borrow" list. Gulp.
The Silver Institute released its report projecting that industrial demand will consume ALL of global silver output by 2015. That's not far away.
Go to the U.S. Mint's "Catalog Home" page and search for silver items. Everything is unavailable, sold out or canceled for the year. The 2011 Silver Eagle is scheduled to be released sometime this fall. Supposedly.
Also dont' forget this one: http://www.zerohedge.com/article/45-scotia-mocattas-registered-silver-transferred-eligible-status
For the futures exchanges to remain as credible clearinghouses they have to raise margin requirements as the price of the contract goes up in value.
5000 oz. silver X $47 = $235000
Yes, the author is correct. As correct as her spelling of "bizzerk" .
The author should grab a pencil and jot down 2 pagefulls of the correct spelling:
BERSERK
BERSERK
Then the author should do everyone a favour and just stick to what her intellect is fitted for: flipping burgers at Mickey Dees.
i thought that bizzerk sounded like eighth grade and not the smart table. also it's pageful.
if a 20% decline in silver brings an inquisition, i'll be amazed (more likely toasting and bonuses). the worst control fraud in the history of the world has yet to bring a single prosecution worthy of the name.
I wonder if the author can spell the words "major supply shortage"?
I wonder if the author understands the word manipulation beyond what her right hand helps her stroke.
Ahmeexnal, you build and powerful and persuasive argument. BTW, did you notice that the author was aware of her unusual spelling of bizzerk, did it intentionally, and linked to to a special dictionary?
http://www.urbandictionary.com/define.php?term=bizzerk
http://www.urbandictionary.com/define.php?term=Lame
or pimping for her SBUX positions.
Why the Hell doesn't the CME just set margin requirements as a percentage of the spot price, for ALL commodities, rather than as a fixed dollar amount? That way, there would NEVER be any need to constantly tinker with them, and it would avoid all allegations of manipulative timing in the raising of those margins.
Anyone?
It's something to keep them busy at work, job security.
Tinkering makes some more money than others.
If you keep making sense like that, you're going to get targeted for "re-education"
I suspect that I am somewhere in the top 10% of that list already.
But akak, they absolutely LOVE tinkering with the markets. Its what they do best and does give them CONTROL, albeit not so much anymore. You have a real problem with that logic thing.
Hint: I asked that question more rhetorically than analytically.