Silver and Margin Requirements Redux

Wary silver investors may be wise to watch out for a pre-election margin hike. Especially if silver’s price gets too frothy or starts dragging the price of gold up along with it, since such events could signal the reemergence of unpopular inflationary pressures.

The Chicago Mercantile Exchange or CME is a self-regulated, for profit organization that sets its own margin requirements. The CME’s maintenance margins for silver futures contracts are still at relatively levels compared with other markets, despite the precious metal’s recent consolidative trading patterns seen prior to the Fed’s announcement of its latest QEIII package.

Lower margin requirements used to attract greater speculative trading activity since it is cheaper to establish a given futures position in terms of the capital required to be placed on deposit as margin.

Due to its per-contract commission structure, the CME profits more from increased trade volume. This explains why it promotes HFT or algorithmic trading as a means for providing liquidity, while at the same time blithely ignoring the heightened market risk of such automated trading methods, as well as their tendency to induce a faulty price discovery mechanism.

Higher Margins Intended to Quell Volatility?

In reality, the CME shifting its margin requirements for silver has been used selectively to impact the market, but not necessarily in the rational manner that one might expect.

For example, the CME has raised silver and gold futures margin requirements even as their prices were already dropping sharply. This rather counterintuitive tactic was employed in early May of 2011, just as silver prices were coming off from their historic high levels achieved in late April of that year. Many traders believe the CME’s move may have contributed substantially to the notable market crash that followed shortly thereafter.

In contrast, the CME has just lowered — yes lowered — their margin requirements for equities related futures contracts virtually across the board by roughly 12 percent. This move announced in its Performance Bond memo dated September 20th, came as a real surprise since equity indexes like the S&P500 have been approaching five year highs.

Market Manipulation Tactics

The CME’s recent margin requirement changes makes them seem like one more in a list of manipulative market 'tactics' used to trigger either big sell-offs at convenient times or to stimulate chronically weak markets just ahead of a national election.

The markets for precious metals are just not deep enough to prevent manipulative behavior. Consider for example, collusion among the other 3 of the 4 largest traders, who together hold nearly half of the entire outstanding Comex short positions.

They might agree among themselves to sell initially, and then buy their short positions back together, thereby whipsawing the market. The high frequency of counter-intuitive moves or 'out of character' price action demonstrates that such collusion may be at work behind the scenes.

Other manipulative tools are the daily caps on upward price movement, but without any limit to how far prices can move to the downside. This comes from the work of GATA, and in gold such price rise caps are rarely over 2%, but are mostly set at 1%.

Furthermore, position limits that enable large speculators to build concentrated positions allow manipulation. The latest proposal to alter position limits was recently thrown out, and it remains unanswered why large banks are classified as commercial traders at all.

Financial data announcements that are potentially ‘adjusted’ can also provoke sharp market moves.

Silver Margin Hike Coming?

Silver prices seem managed, with convenient crashes coming at seemingly just the right time because the metal is tied to the greater economy.

This reinforces the idea that, despite the industrial demand albatross, silver is still an unofficial yet ever present currency anchor.

Furthermore, the Fed’s recent open-ended QE announcement — along with more and more investors waking up to the silver story— has created a notable rebound in precious metals sentiment that is increasingly being reflected in silver’s price.

Perhaps one should not be too surprised to see another silver contract margin requirement hike coming soon from the CME.

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