“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"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


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Friday, September 23, 2011

CME hiking Margins on the Precious Metals Monday

As of  the close of trading on Monday afternoon, margins for the precious metals will be increasing.


For Gold

Old Margin                     New Margin

$9,450                         $11,475

Old Maintenance           New Maintenance

$7,000                         $8,500


SILVER

Old Margin                  New Margin
$21,600                      $24,975

Old Maintenance         New Maintenance
$16,000                     $18,500

I would not read too much into these margin hikes as far as any determined attempts by the exchange to induce more selling. This time around I believe the hikes are legitimate. When you get a market like silver that drops 15% in ONE DAY, you are going to get margin hikes. The reason - the very integrity of the Clearinghouse comes into play.

Silver closed down $6.48 today. In a single session, one long contract in this market cost the buyer a paper loss of $32,400! That is enormous. If you consider the fact that the previous old margin was $21,600, that was wiped out and then some.

During the clearing or settlement process, the winners get paid (have their accounts credited) by debiting the loser's accounts. If the losers do not have sufficient funds in their accounts, the whole process breaks down. Guess what then happens? The Clearinghouse comes to the brokerage firm whose clients do not have sufficient funds and says to them "You pay us the difference and then go and get it from you customer". If the brokerage house does not have sufficient wherewithal financially to make good on those losing trades, we have a major problem.

When we get these wild, insanely huge ranges in a single day, the computer programs used by the exchanges to measure volatility are going to flag those markets and will raise the margins to make certain that there are no problems paying ther winners.

We might see some additional selling pressure from this margin hike hit the metals Sunday evening or Monday morning but I am of the opinion that anyone who was trading gold or silver and who was already undercapitalized going into today's (Friday's) session, has already been paid a visit by the resident margin clerk and been told to either sell out the position or wire the money immediately. Not many have sufficiently deep pockets in the smaller spec category to carry that sort of paper loss, so I believe a large number of them are now gone.

7 comments:

  1. I guess their really trying to force the market down even more than today. I bought silver today and will buy more on Monday when the precious metals fall again. Thanks for the information.

    ReplyDelete
  2. you must mean they're *cutting* margins...which makes complete sense as we've had some serious upward pressure on the metals these past few days...

    ...oh wait :) they really ARE raising [rolls eyes] and that was DOWNSIDE pressure.

    ReplyDelete
  3. Sprott Money Temporarily Runs Out of Physical Silver, who cares about Margin. thanks, just makes it cheaper for the physical.

    ReplyDelete
  4. There are no small specs in Ag market, they got wiped out in the May raid!

    ReplyDelete
  5. What would be the Exchange public justification for raising margin rates now?

    ReplyDelete
  6. Dan, is it normal for them to raise margins on large declines? I don't recall that happening to silver in the past, unless you consider the series of hikes in May to have been done for that reason, as silver was tanking. But I also haven't been following the markets nearly as long as you have.

    ReplyDelete