The CME raising margins for Silver Futures to such a degree that relative to market price, futures multiplier, and physical demand by consumers is just too high has basically killed the silver market. Throw in the fact that many brokerages have even higher margins than the exchange margins, and outside of a fed announcement, the silver market has all but dried up, when compared to the much more active physical market for silver.
The Silver contract which closed Friday at $31.93 an ounce has an initial margin of $16,940 with an overnight margin of $11,000 at a typical brokerage.
Now I know this market went through a very volatile trading phase, and with all the turmoil regarding Europe and central bank decisions around the world, it was probably a good idea to raise margins beyond normal percent driven formulaic metrics, until things settled down given the number and magnitude of the trading losses experienced at many brokerages.
As in, when brokerages institute higher margins than exchanges this tells you how many accounts were blown out with the crazy gyrations in the silver market when it was having 20% swings in a week.
I know margins have come down from the $21,000 to $26,000 level as the precious metals markets have settled into the new monetary landscape, but silver margins are still too high relative to the volatility and price in the contract.
How do I know this? The reason is that the silver futures market is not reflective of the actual demand in the physical silver market where at times the silver physical market is priced higher than the futures market.
Furthermore, consumers just cannot get enough of those American Eagle silver coins. I reference the fact that the mint has sold out of silver coins again.
In addition, with Platinum surging, at a higher price than Gold for a brief period this week due to mining concerns and stronger economic data of which is important due to the industrial use for the metal.
Well, silver plays the happy medium ground in being a store of value more than Platinum, but more of an industrial metal than Gold.
I believe the Silver market is mispriced relative to the price of Gold, Platinum, and the market dynamics in the physical space regarding Silver demand by the consumer.
Therefore, what is a fair price for Silver? What price do you think it should be trading at if margins were the right amount? First of all, I think the correct margins for the silver futures contract should be $9000 per contract with the overnight maintenance amount of $7200.
And given this margin level, and a healthier participation level, I envision silver trading around $42 to $45 dollars an ounce. Moreover, the brokerages need to have the same margin levels as the exchanges.
There are other ways to manage risk for the clients and the brokerages through comprehensive liquidation procedures and account monitoring.
As it is always bad when electronic markets are so constrained that they don`t adequately reflect the demand in the physical market.