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.