"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Monday, February 21, 2011

Limits in the Comex gold and silver markets

Dear friends:

I posted a reply to some questions regarding this from some of the folks who had read my article on a Commercial Signal Failure but I suspect it got lost in the list.

I thought it best therefore to go ahead and post it up here to make it a bit easier for folks.

There are no limits on gold and silver trading as far as how much the price can move during any trading session.

The purpose of a price limit is to attempt to "cool down" a market that is either collapsing or soaring with the main idea being that it gives traders a chance to reflect a bit more on the news development or event that might have triggered a move of that extent. We traders tend to be a knee-jerk, reflexive type and will move quickly when something occurs that is either very bullish or very bearish. Sometimes, however, after we get a chance to think through the news development, we realize that we overreacted. That allows us to "correct" the price movement of the previous day and restore a bit more balance to a market. If not for this "cooling off" period, price might tend to make too much of an exaggerated move unnecessarily creating havoc among hedgers and some speculators.

However, when a news event, a crop forecast, a geopolitical development occurs that can affect a market, such as the grains for example, and this development greatly alters the supply/demand equilibrium, the markets can trade limit up or limit down several days in a row. When this happens, the exchanges typically have a set of rules that gradually increase the extent to which a price may move before it can no longer trade above or below that level during that session. This is to facilitate trade so that the market can actually function and allow some exiting of positions. A market that has too small of a price limit can and will lock limit bid or limit offer and simply will not trade at all.

A perfect example of this has been the cotton market which is in itself has been experiencing a type of commercial signal failure right now. It has been trading on expanded price limits quite often over the last few months.

Generally, once the price no longer locks limit bid or limit offer, and price begins to trade freely once again, the exchanges will then take another look at the contract and determine when to reduce the price limits as they attempt to bring them back towards the original defined move limit.

This lack of a daily price limit is also one of the reasons that speculators in the precious metals need to be careful. Those things can move a very long way and keep on going and if you are on the wrong side and do not employ good money management techniques, you can easily get wiped out in a hurry.

Watch out for complacency and overconfidence. They are killers!


  1. Dan,

    Really appreciate the post and response to my question on limits. Have been a follower of your work on JS Mineset since '05.

  2. Dan,

    Great insight, I appreciate it all.

    I'm curious, if you or any readers could offer some color, on what happends to the options market during a move like you've discussed.

    I'm curious what the options would do, on say, day 2 of what eventually becomes an 8 session limit up move. Obviously, IV explodes, but do they start foreshadowing the peak price to come 8 days away? For instance using the limit price as a datum, do at-the-money puts start moving with say a delta of 0.45? 0.35? While the ATM calls start moving with a delta of 0.55, 0.65? Does put-call parity go out the window?

    During the initial phase of a limit up move, can you tell how bad it's about to get by looking at a disconnecting options pit, or does it disconnect at all? Relative to normal liquidity, are options liquid during the move? What happends to Option Open Interest?

    Any insight would be great. Thanks,

    Jeff McLarty

  3. Is this true, no price move limits, of the SLV ETF too Dan? Thanks.

  4. Jeffrey:

    the option markets generally will indicate at what level they think price will move to. They will trade freely when the futures board is locked limit bid or offer so they can give you a gauge of where the market thinking is in regards to where the consensus at that moment believe price is headed. That is why they remain liquid during limit locked futures markets.

    Remember however, option writers can get hurt very badly if they are writing calls in a bull market and do not give themselves enough protection for a big upmove. That is of course why the premiums on those things go out of sight during a move like what we saw happening in cotton for example.

    Puts generally will not rise at the same rate as the calls unless there is extreme volatility in the sense that the market is making big intraday swings back and forth or up and down. That is not the case with what happens in a CSF where the price rises and does not look back. In other words, when the market is basically a one way show, the puts will have a smaller delta. As to what exactly that might happen to be, I really cannot say with any degree of accuracy. It depends on the market and what is moving it.

  5. Thanks Dan...for once I didn't have to learn a lesson from the market, the hard way.


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