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High Margin Requirements Are Killing The Silver Market

Submitted by EconMatters on 01/19/2013 22:36 -0400

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.

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Sun, 01/20/2013 - 10:24 | 3170467 machineh

'Given this [$9,000] margin level, and a healthier participation level, I envision silver trading around $42 to $45 dollars an ounce.'

So the author proposes 'E-Z financing' to drive up the price. That's the same logic that drove the 'liar loan' real estate market to an unsustainable high in 2006.

Basically, if an asset can't rise on its own without the artificial boost of E-Z financing, it probably sucks.

Silver's in a class by itself when it comes to having uninformed, thumbsucking, wishful cheerleaders. Sell your silver, get a life.

Sun, 01/20/2013 - 02:52 | 3170234 Market Analyst

Corn margin is incorrect. You do know that CL dropped $20 in 24 hour period. The problem with the short posting margin argument is that the dynamics of the physical market are long, central banks printing, wall street bullish sentiment in all assets, means that most markets are risk on these days, so the higher margins in SI are adversely affecting, what would otherwise be more longs in the market, not shorts.

Big institutions are affected just like smaller players with higher capital requirements, anything that adds or takes away liquidity hurts big players as well, this is why QE is so stimulative - it increases capital that can be applied to markets, or carry trades, i.e., risk on currencies - do you deny this?

Sun, 01/20/2013 - 04:41 | 3170281 sessinpo

Margins was this and that in this market and that market

Margin for real estate went way down before its collapse as it let people speculate in that market that wouldn't have normally.

So, let's lower all margins and make big bubbles in all those markets. You guys are Ben Bernanke juniors.

Oh, yea, I know I pissed a lot of you off so give me the down arrows. I speak the truth even if it pisses you off. Now make an argument against my logic with substance. Margins are there for a reason.

Sun, 01/20/2013 - 04:02 | 3170274 jballz

Don't tell me what the margins are asshole I am running SPAN on a saturday night.

You are, either a 12-year old lost on the way to an online monopoly tourney or you really ARE a market anaylyst, and god help whatever fucking clowns are listening to you.

Sun, 01/20/2013 - 00:47 | 3170147 willwork4food

Geez man...if I lose won't ObamaCME cover me?

Sat, 01/19/2013 - 23:55 | 3170096 dumpster

just take the cash to the fight 100% on the barrel head

the paper market is a clown of fools .. zero sum game

Sat, 01/19/2013 - 23:55 | 3170095 Son of Loki

Ben hates silver.

Sun, 01/20/2013 - 02:43 | 3170232 All Out Of Bubblegum

Hey now, he thinks gold is a nice tradition.

Sun, 01/20/2013 - 00:08 | 3170112 philipat

If he ever wants to see the USD decline to inflate away the debt in the light of matching Fiat printing by other CB's, he's probably going to have to start loving it.

Sat, 01/19/2013 - 23:48 | 3170085 philipat

JPM might have a different view as to why Silver futures do not reflect the real value of the physical?

Sat, 01/19/2013 - 23:58 | 3170100 NOTfromSanFrancisco

"JPM might have a different view as to why Silver futures do not reflect the real value of the physical?"

I concur.

Sat, 01/19/2013 - 23:45 | 3170081 4Y_LURKER

SILVER BITCHEZ!!

Sat, 01/19/2013 - 23:40 | 3170070 holdbuysell

"High Margin Requirements Are Killing The Silver Market"

Patient: It hurts when I move my arm.

Doctor: Then don't move your arm.

Sun, 01/20/2013 - 03:29 | 3170259 Dr. Sandi

Screw paper silver. I'm going to trade Mom's cow for some magic beans. At least the magic bean guy hasn't robbed me lately.

Anybody 'bold' enough to play in the silver pool deserves to drown in a riptide of bad paper.

Also, I'm pretty sure somebody took a shit in the pool, and their initials are MFG.

Sun, 01/20/2013 - 04:56 | 3170287 sessinpo

Actually, I wouldn't trade paper just on pass experience, several decades ago, I traded the COMEX. I always felt I was being front run. It wouldn't surprise me if it happened on the other exchanges.

Calling it bold to play is putting it very politely, and I congradulate you on your use of words. By the way, my last account was at Mann Futures (Financial) over 10 years ago. It didn't take me long to leave them. It didn't take me long before I knew they were shady. This is way before they became MFG.

Sat, 01/19/2013 - 23:20 | 3170042 livid levity