Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Real Reason For Rising Margin Requirements for Silver Commodity Futures

Commodities / Gold and Silver 2011 May 18, 2011 - 07:36 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleJon D. Markman writes: CME Group Inc. (Nasdaq: CME), which provides an electronic exchange for commodity futures, raised margin requirements for trading silver futures contracts on May 4 - resulting in a steep drop in silver prices.

A similar thing happened last week in the oil futures market when the CME Group last Monday raised margin requirements on oil contracts by 25%.


While the impact of that decision was not immediately felt, it seemed to have a delayed effect on the futures market. By Wednesday, there was so much selling that the exchanges had to close trading in oil and gasoline to chill everyone out for a while.

Of course, the CME did not need to do this, as there are no set rules for raising margins and oil prices were already coming down.

So what exactly was the motivation? And why start with a 25% hike, which was much larger than the hike in silver margins?

One reason that was a bit hidden was a letter sent jointly by 17 U.S. senators to the U.S. Commodity Futures Trading Commission (CFTC) that demanded that position limits be put on speculators in energy futures and derivatives by May 23. The Dodd-Frank Act had already required position limits but had not yet implemented them.

Senators were apparently of the belief that the surge in oil prices last month was caused by speculators.

But the reality is that most energy trading is done by commercial hedging operations in which the owners of crude oil assets - basically oil companies like Whiting Petroleum Corp. (NYSE: WLL) - make deals to sell, say, half their production for the quarter at $90. Another party takes the other side of that trade. If oil is higher than $90, the hedger wins.

You could say that is speculation, but in reality it is providing a service to the oil company, allowing it to lock in prices at a level that will ensure a profit and the ability to keep up its drilling program.

Some analysts are now suggesting that a lot of the big commercial hedgers are going to simply pull up stakes and move their business offshore to other exchanges. That would be a shame, because without their speculations, our markets will face fewer ways to reduce their risk. It would be an unintended - albeit ironic - consequence that Congress' attempt to cut risk would end up increasing risk.

At the same time, it's apparent to some veterans that the government is trying to tell the public that investing in commodities is too volatile and that they should focus on buying stock and government bonds. If that's true, officials are playing a dangerous game, and I doubt they fully understand the potential consequences of their grandstanding.

Meanwhile, is it perhaps an odd coincidence that this measure was taken just before oil executives were due to be hauled up in front of Congress this week for their semi-annual flogging? I don't think so.

This politicization of markets can only work for a brief period. What happens when the oil price takes off due to the next Middle East war or a supply interruption? It is very doubtful that CME can control the global price of oil, and any attempt to do so will have unexpected consequences down the line.

We are at the threshold of a change of eras. For years, commodity prices were very sensitive to the actions taken at the U.S.-based exchanges because they all traded exclusively in dollars. That sensitivity will continue, but will diminish as demand shifts toward Asia. As that happens, the currency with which buyers pay for oil will increasingly not be dollars.

India is already paying for oil in rupees and China is paying for Russian oil in yuan. Some analysts argue that the commodity exchanges may be surprised by how high they have to raise margins in order to bring prices down. They may also be surprised by how fast markets snap back.

The real problem for all of us who trade stocks and not commodities is that futures traders react to the need for more margin in one of two ways: either by selling contracts to get their portfolios in line with the new requirements, or raising capital via the sale of other positions in commodities like corn or equities.

And that is the slop-over effect that we saw last week.

Yet looking down the line over the next few weeks, once that offloading of positions is complete, it may create a vacuum in which there are no more sellers. The silver debacle a few weeks ago reminded some analysts of the October 1987 stock market crash in that all the damage was done in one week. Following that 1987 crash the next up-phase started just six to eight weeks later in December.

So the question we're now left with is: If silver and oil are crushed now due to the CME action, will they stabilize and start to move much higher in a new up leg in July or August?'

My guess at this point is that they will, if for no other reason than that new turmoil is likely to arise in the Middle East and North Africa to threaten supply again. If so, we will be able to buy a lot of great energy companies cheap over the summer in anticipation of higher prices in the fall.

I will make sure you are ready for that.

[Editor's Note: Money Morning Contributing Writer Jon D. Markman has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find.

It will take a seasoned guide to uncover those opportunities.

Markman is that guide.

In the face of what's been the toughest market for investors since the Great Depression, it's time to sweep away the uncertainty and eradicate the worry. That's why investors subscribe to Markman's Strategic Advantage newsletter every week: He can see opportunity when other investors are blinded by worry.

Subscribe to Strategic Advantage and hire Markman to be your guide. For more information, please click here.]

Source :http://moneymorning.com/2011/05/18/...

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in