The silver highway to regulatory risk

Silver is not probably one of the metals you watch. While we hear about the price of gold all the time Silver is in many ways the poor cousin. But if there was ever going to be a useable metallic standard it would probably be silver rather than gold. This fact has been picked up over the past few months by “spread traders” who, seeing Gold’s stellar rally, thought they’d buy up silver.
There has been a lot of speculation in this market as the series of charts below on the silver market, monthly for 20 years, weekly for 10 and daily for the past year show. Speculation of this kind is unhelpful in any market because speculators ultimately feel gravity’s impact more heavily than end users (Everready, Duracell etc) who consume the product or longer term investors. It’s why market crashes accelerate. The specs are just getting stopped out and have no option but to sell or get closed out.

What you see when you look at the longer term charts is that they are in serious nose-bleed territory both in terms of price and momentum indicators.


Clearly the exchanges and no doubt the CFTC (Commodity Futures Trading Commission – the US body that regulates futures markets) agrees. 
CNBC yesterday ran a story saying:

The CME Group (Chicago Mercantile Exchange ) has raised margins three times in a week, making it more expensive for traders to place speculative bets. The latest hike raises initial margins on speculative positions in silver future by another 12% as of close of business Tuesday, May 3.

Initial margins mean that traders need to put down more of a deposit when they enter the market which has the effect of reducing the leverage available to them for any level of capital. 
Silver was up 88.58% this year until the high last week and up 28% in April alone. The impact of this news was clear in trade yesterday with a precipitous fall and silver is now down 15% from the high.

The importance of silver in the broader context can not be underestimated. In its own way, the CME  is fighting against the impact and distorions of Quantitative Easing. It is taking control, or at least, trying to take control, of its market, to prevent speculators running riot. It’s a trend that is occurring in some home currency markets and a trend that will likely broaden if the USD weakens any further.

Throw in a paradign shift towards real and perceived shortages in various commodity markets and you can expect much more of this kind of regulatory intervention.

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  1. It is exactly the same as what happened when Bunker Hunt cornered the silver market around 1980.

    When the price hit around $50 an ounce, they changed the exchange rules to force everyone to sell their positions.

    Those on the inside who lobby exchanges to make these changes and know they are coming make a killing, at the expense of those who don’t.

  2. “It’s a trend that is occurring in some home currency markets”

    Hmmmm, maybe there’s some connection there… perhaps silver is a currency?

    Perhaps even speculators are ‘running riot’ in silver because government ‘money’ is in fact not money at all but a bad form of credit?

    Would you accept dud cheques?

  3. Sandgroper Sceptic

    Didn’t the Hunt Brothers buy everything on margin? The margin changes really screwed their pooch. This time around I expect a lot more hands are buying the metal with cash and holding the physical, the margin changes are not going to affect them. Everytime there is a fall in the price, demand for the metal seems to soar.

    Has anyone tried buying the physical? From the internet reports tt seems more and more Mints and resellers have a shortage of physical, with longer and longer delays for delivery, even with these current prices.

  4. A number of blogs follow silver with active interest. Of course, if the rumors are true and one of the TBTF institutions is precariously positioned, governments and authorities will change “rules” and make accommodations as required.

    One of my favorites:

  5. i dont think you can print silver? let us know when you can…on the other hand, you can run a tight ship and watch spending even if you have to make “cuts”, when the govs do this im sure the PM markets wont be so volatile as well as oil, food etc etc.

  6. JP Morgan and HSBC and naked short 250 million oz of silver, they can’t cover that position. When the price hits $60 they will be $140 billion in the red. Expect a default and a bailout from the Fed. Thats why the margins are changing and the price is being manipulated – trying to shake off the weak hands.

    • Interesting…got links, sources. Seems you are suggesting that silver speculation, of all things, could cripple some more investment banks…?

      • From Financial Times late last year

        “Bart Chilton, a CFTC commissioner, said in October that he believed there had been “fraudulent efforts” to “deviously control” the silver price. He did not name any party.

        Publicly available data on individual traders’ positions are sketchy. In a speech last Wednesday, Mr Chilton said that “earlier this year, one trader held more than 40 per cent of the silver market”. He declined to identify the trader.

        The CFTC’s Bank Participation Report shows that one or more US banks held a gross short silver futures position equal to 19.1 per cent of the total number of outstanding contracts in early December. In January the share was 30.2 per cent.

        The CFTC only reports data for the US silver futures market, a small corner of the global derivatives market for the precious metal, which is centred in London and largely traded via private over-the-counter deals. The data also do not cover transactions in the physical market.”

    • Not sure this is completely true. while im sure they are short it maybe they are just acting on behalf of the miners. This is the futures market we are talking about and if i was a miner and silver cost me $5 a ounce to get out of the ground, id be short everything i thought i had in the ground right now.

      that said fuck JPM they are bloody desperate to suppress price right now.

      • Yes that is true they may be hedging on behalf of miners etc…..but to forward sell 20 years of world mine supply is a bit “over the top”

  7. yeh theres no manipulation, in the after hours market the price has tanked 10% at the same time 2 days in a row, with physical shortages. nothing to see here. george orwell would be proud.