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Will Rising Silver Margins Cap the Market?

Silver bar and coins
Thomas Northcut | Photodisc | Getty Images
Silver bar and coins

Silver margins are going up—again. As the CME tries to keep pace with the explosive silver rally, the exchange has now hiked margin requirements eight times in the past twelve months.

While increased margins are more of a reaction to price and volume than a meaningful intent to control prices, market watchers say that increasing margins has sometimes caused investors to reduce positions and deleverage in order to meet those higher margin requirements.

Despite today's sell-off, it seems unlikely that rising margins are capping or, impacting this particular silver rally in any meaningful way. One market analyst calls for a 30 percent hike in CME's margin requirements to cool the market. But, raising margins at the CME has become a smaller part of the global picture.

As of Friday, April 21st, 2011, open interest in silver futures was 149,899 contract, or less than half of what it was in 1976. According to a CME spokesperson, in December of that year open interest in COMEX Silver futures contract with the same basic specs as today's contract was 427,749 contracts.

Where has all the open interest gone? In the globalized financial system there is more competition for over-the counter business as well as futures business from India to Japan to Dubai. And Silver ETFs including the iShares Silver Trust have commanded a significant market share.

Carlos Sanchez, CPM Group Director of Commodites Management agrees that the CME is a smaller percentage of the open interest globally. And, he says investment style has changed. Sanchez attributes some of the decrease in open interest at the CME today versus 1976 to the nature of market, "Investors were longer term back then, now, investors trade for hours or seconds." Sanchez sees the rally continuing in the near term with a push above $50 an ounce. "I don't think it will stop", he says "because there are so many factors supporting silver prices."

Increased margin requirements effective after the close of business on Tuesday, April 26, 2011.

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