Gold, Silver Markets Roiled By Move to Curb Speculation

Precious metals markets continued to be chaotic Wednesday—with both silver and gold futures down sharply—after the main commodities exchange moved to tighten margin requirements on silver to cool speculation in metals.

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

“It’s like trying to pick strawberries out of a blender,” said one Comex trader of the volatility as speculatiors scrambled to rebalance their positions in anticipation of the new margin requirements.

On Tuesday the Chicago Mercantile Exchange informed traders that it was raising the amount of margin—how much cash an investor has to put up front to cover trades—on Comex silver futures contracts. That prompted speculation that the CME would impose similar increases on gold.

The new requirements make it more expensive for speculators and investors to hold positions in these hot commodity markets.

Silver futures prices fell sharply after the announcement, recovered overnight and then declined further on Wednesday. US gold futures also bounced around but were down sharply.

After the close of trading on Wednesday, investors seeking to put on an initial position in the silver futures market will be required to post $8,775 per 5,000 ounce silver contract versus the previous $6,500. And investors with existing positions that are losing money will be asked to post $6,500 instead of $5000 for ongoing “maintenance” margins.

Gold Bars
Gold Bars

While the new margin requirements make it riskier for traders to make highly speculative bets, it could actually end up being bullish for the markets, says Kevin Grady, a trader for MF Global.

That's because traders with "long" positions—who bet prices will rise—aren't affected while "short" traders—who bet prices will fall—will get squeezed out because they have to put up more money to maintain their bets, he says.

Jim Steel, HSBC chief commodity analyst, says history shows that reaction to such margin adjustments are “sharp but short”. The last time margins were increased was after close of business June 7, 2010 when the price of silver was roughly 50% lower than it is today.

One question being asked is whether the increase in silver margins portends an increase in margins on gold or futures in other commodites. While always a possibility, traders note the reaction following the increase in silver margins may have taken some of the froth out of the market already.

“Traditionally, changes in margin don’t alter the fundamentals of the market”, says Steel, a bull market in gold is still a bull market. But what he is watching are yields creeping up in the 10-year. More relevant than margin rates, higher interest rates increase the cost of holding gold and that makes it a less attractive investment.

Gold remains the bigger focus, bigger market and more important global story. But silver is certainly a trader’s market for now.