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Silver Trading in Depth

By: International Business Times
Posted: 3/29/2011 4:55:00 AM
Referenced Stocks: CME;JPM

Some insight into the Silver market

Silver rose to over 37 oz last Thursday morning to make fresh 31 yr high, but in the afternoon faded back to about 36 oz.

The afternoon fall was caused by the Chicago Mercantile Exchange ( CME ) on its margin requirement price rise.

The Chicago Mercantile Exchange ( CME ) is the World's leading derivatives market place. On the CME, precious metal futures, like Gold and Silver, see heavy trading action from players and institutional investors from around the World.

To trade on the CME, players and institutions have to adhere to a set of rules and requirements. One of them is how much margin is needed to purchase a certain amount of a commodity.

The CME can change the margin requirements without warning and at anytime. Thus, the increase in a margin requirement means that those players or institutions that are Long a commodity must increase the amount of cash they have invested in their position, that is if they are to hold it. Otherwise, they are forced to sell some or all of their position to meet the new requirements.

Thus, the Key reason Silver sold off in the afternoon last Thursday was; the CME raised its margin on Silver futures, and those who did not have enough cash to cover the additional margin then were forced to liquidate some or all of their positions, causing an immediate drop in the price of Silver.

And, those buyers who were considering entering into the upward momentum Friday morning likely stayed away from doing so as they expected Silver to fall.

Raising margin requirements for Silver is nothing new for the CME, as less than 6 months ago, in November 2010, they did the same.

The reason the CME gives for taking this action is to limit Silver from getting overly volatile.

When we look at the Average True Range, ATR, a measurement of volatilit, for Silver over the past 6 months, it does look like the CME was successful in accomplishing this.

In November 2010 Silver was trading over 1.00 ATR, and after the margin hike the ATR dropped 20-30%.

During last week the ATR in Silver rose to over 1.00, and the CME wants it lower.

Though raising margin rates is Bearish for the price of Silver in the near term, as seen last Thursday afternoon, it does not mean that it will cause a retracement in Silver prices in the coming weeks or months. Note, that after November's margin hike, Silver has marked a great rally of about 71% over the past 6 months.

Some players speculate that the CME has an ulterior motive for raising margin requirements. It is widely written that there are major banks, including JPMorgan ( JPM ), that are stuck in huge Silver Short positions.

The scuttlebutt is that the CME is trying to avert another bank meltdown, like seen in Y 2008, by slowing the upwards acceleration of the price of Silver. Perhaps this is true. Stay tuned...

Paul A. Ebeling, Jnr.