Precious Metals Patterns

Tue, 16 Nov 2010 17:47:00 GMT

Precious Metals Patterns Gold and silver markets have finally reverted to their normal behavior as the CME has announced additional margin increases and commercial shorts have increased their buying on the downside. This is good news because the federal government and banks are financing excellent opportunities for investors that are paying attention.

At first glance it seems that the commercial traders are the best on the street as they have reduced their net short positions to 50,000 contracts in silver - about 25 percent off their peak short position two months ago. Indeed this is impressive. However a bigger picture view shows that the net commercial short position has fallen to levels seen in late July. During that time, silver has risen from $18 to $25 created an estimated loss of $1.75 billion for the commercial shorts and an equivalent gain for counterparty long investors. While these traders can be commended for their tactics, their strategy of thrashing has proven to be pointless.

On the other side of the trade, bulls have won on multiple points. The recent correction has unwound sentiment and overbought technical indicators, yet gold and silver remain much higher than they were even two months ago. In addition, those wishing to buy more have been given another chance. It is much easier to accumulate profitable positions during corrections rather than while chasing prices higher. Silver could easily correct to $22 or even its breakout level of $20 before resuming higher. Gold could correct to $1320 or its breakout level of $1260 before resuming higher.

Traders that follow the actions of banks and governments rather than words and positions can see pristinely clear opportunities. Over the last two months, the Federal Reserve has begun to monetize treasury debt, and banks have increased their efforts to consistently buy as much gold and silver as they can. Nothing could be more bullish.

Why Silver Margins Should be Higher

Thu, 11 Nov 2010 18:52:00 GMT

There has been a lot of confusion over the announcement by the CME to increase the margin on silver futures contracts by 30 percent. Several articles have claimed that it was the cause of the recent selloff in silver because it forced buyers to cover their positions. This notion is completely false, and in fact the market would be better off with higher margins.

While a 30 percent increase in margin requirements sounds like a lot, the truth is that the increases was $1500 per contract where each contract is currently valued at $136,500. On the day that the price of silver was up over $1, the margin maintenance was increased by 30 cents. This means that no long holder would have had to put up any more money (until the selloff) and any investor that was holding long positions from before September is still holding gains of $8 per contract. If anything, raising margin requirements should have squeezed short positions more since the price has increased substantially in recent weeks.

Even now, the margin requirements of silver are 4.7 percent of the contract value. That means that a trader's equity will be completely wiped out in a 4.7 percent move. Professional metals traders are well aware that this is too low of a margin and any successful trader will hold much more capital per contract than required. The result is that investors self-impose their own higher margin requirements by reducing leverage far below the theoretical exchange defined requirement.

Margin requirements should be higher on silver contracts, especially for short sellers because silver has already increased by more than 5 percent in a day and is at risk of gapping higher at any time. This introduces the risk of default by a large trader that fails to meet margin requirements and makes the entire exchange less stable. Exchange risk is not priced into the precious metals markets, however it eventually will be when it is understood that the probably of default is approaching 100 percent. The margin increase is a reminder that the exchange can and will change the rules when commercial shorts are squeezed into default.

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Precious Metals Patterns

Why Silver Margins Should be Higher