Thursday, March 24, 2011

Silver Futures

This afternoon the CME stepped in and raised the initial and maintenance margin requirements on silver again.  They have more than doubled it in less than 6 months.  Same goes for the Uranium contract but stay focused on the poor man's gold for now.

Margin requirements are important because they dictate how many contracts can be held by a trader.  When the requirement doubles, buying power is chopped in half.  This is a key tool in keeping control of prices on the exchange.  When something is overheated they can inch up the requirement to cool it off and curb speculation.  When they more than double the rate in less than 6 months there is a high likelihood that a major problem exists.

What could that problem be?  The quantity of silver sold onto the contract market is far greater than the physical supply of silver available for deliver.  Current contracts are trading at a premium to future contracts.  This has been discussed here in the past as a condition called backwardation and indicates fear of failure to deliver in the future.  This is definitely not a healthy condition in markets.

It should also be mentioned that when the exchange raises requirements and curbs trading it reduces revenue that goes along with that trading.  Surely this will begin to affect the exchange, although not as much as a widespread public notice of failures to deliver on contracts, which would send silver parabolic on the chart.

Finally, the margin requirement has been raised from $5,000 to $11,138 per contract since November of 2010........This is what it looks like when you try to stop a bull......

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