Friday, May 6, 2011

Did increasing margins break Silver in 2006?

You can read my previous posts on CME Margin changes here:

Yesterday - CME gets aggressive with Silver margins!
1 Week Ago - CME Increases Silver Margin Requirements
6 Weeks Ago - CME Hikes Silver Margin Requirements‏ (Again!)

I certainly didn't intend on covering Silver margin changes again so soon, but I stumbled across something very interesting and thought I would share.

The below chart is from 2006, the numbers above the candlesticks relate to events which I will detail below:

1. Silver Margin Change Announced - April 13th, 2006
2. Silver Margin Change Effective - April 17th, 2006
3. Silver Margin Change Announced - April 20th, 2006
4. Silver Margin Change Effective - April 21st, 2006
5. Silver Margin Change Announced - May 15th, 2006
6. Silver Margin Change Effective - May 16th, 2006

The first of the three increases saw the initial margin rise from $2,430 to $3,510, a whopping 44% increase (link), however the price of Silver continued to climb.

The second saw an increase in the initial margin from $3,510 to $4,725, an increase of 35% (link). This announcement saw sellers flee Silver in droves sending the price from a $14.69 intraday high on April 20th to an intraday low of $11.60 on April 21st, a 21% fall in 2 trading sessions, on April 20th alone Silver fell 18.5% (price figures from Incredible Charts).

I found this blog entry from April 20th, 2006:
Gold/Silver Smack down

Wow! Gold and silver took a beating today, to put it lightly. Gold spot ended Comex trading at $619.60, off 2.07% from yesterday. It went down another $7.90 in the Access market. If you think that's bad, look at silver: down $2.13 or a whopping 14.65% in Comex trading, and another 49 cents to end at $11.92 in the Access market. For the day, HUI was down 25.90 to 359.40. Several of my stocks were down double digits.

Well, why do I sound almost giddy? A correction was due, to be fair. This sell-off was most likely precipitated by the new margin requirements. To be fair, the Nymex has been steadily raising margin requirements as can be seen from its new archive, although the pace is picking up. Whatever the reason, I consider this sell-off enormously healthy for the golden bull. Investing the Middle Way
The third of the Silver margin increases that I found saw initial margins move from $5,400 to $7,020 (link), a 30% increase. Based on the gap between the second and third examples I assume there was another in the middle (I was unable to source the date it occurred). On the day of the announcement Silver fell almost 9% in one day. This was the tipping point that saw Silver fall from just over $15 to under $10 in around 1 month.

Silver margin increases aren't the only similarities between the 2006 Silver spike and today's. There is some similar activity by the commercial entities in the commitment of traders reports. This from May 9th, 2006 (only a couple of days before the final May 2006 peak):
It looks like we are getting close to a low risk buy point in silver. The latest COMEX Commitment of Traders data related to the short position of the Commercial Traders (commercials) shows that the commercials have closed out a large portion of their short position. Silver Seek
This from April 29th, 2011 (the peak of the recent run):
Yesterday's Commitment of Traders Report [for positions held at the end of trading on Tuesday, April 26th] was shockingly bullish for both metals.

In silver, the Commercial net short position shrank by a whopping 10,158 contracts...50.8 million ounces...possibly the biggest one-week decline in open interest in silver, ever.  Ted says that it was mostly the '4 or less' traders [read JPMorgan] and the raptors [the '8 or more' small traders in the Commercial category that were covering short positions and/or going long. Casey Research
Another similarity is that we have some big names selling Silver. In 2006 it was the Buffet family, this from May 7th, 2006:
With the market abuzz with anticipation of what Wall Street legend Warren Buffett intends to do with Berkshire Hathaway’s $40 billion in cash, a small, but perhaps very significant little bit of news may have been overshadowed.

At the company’s shareholder meeting in Omaha, Nebraska on Saturday, Chairman Warren Buffett announced that the company has divested its silver holdings.

David Morgan, author of “The Morgan Report,” sent a note to clients quoting an anonymous source at the Berkshire meeting who confirmed the sale.

According to the source, no sell price, date or addition data were given other than the announcement that the company not longer owned any silver. Resource Investor
Today we have Carlos Slim (world's wealthiest man according to Forbes Magazine) actively selling Silver futures, this from May 4th, 2011:
Billionaire Carlos Slim has been selling silver futures for "weeks" in an effort to actively hedge the production of his silver mine, a spokesperson confirmed to CNBC Wednesday.

Slim, recently designated the world's richest man by Forbes magazine, has been selling futures contracts dated out two to three years, a spokesperson also confirmed. CNBC
What's more is that the timing between the 2006 top and the current one are very similar. Both started around August the year prior. Both look to be topping around April/May the following year. The 2005/2006 run saw Silver increase from $6.75 in August 2005 to around $15 in May 2006 (roughly 120% move). The 2010/2011 run saw Silver increase from $18 in August 2010 to almost $50 in April 2011 (roughly 175% move).

If we saw similar trading activity to that in 2006, then we could soon see Silver rally hard back to test that $50 area before another sharp correction and long consolidation occurs. Of course there are no guarantee, but at the minimum a small bounce from these levels seems likely given how oversold Silver is looking.

Disclosure: Position held in Silver. Not investment advice. Do your own research.


  1. Great post @BB

    Just shows the incompetence of those running things and their apparent eagerness to please their larger clients at the cost of everyone else. Reminds me of the Mafia and racketeering unleashed.

    One socio-economic fundamental that we must never lose sight of is that politicians are always drawn from the corruptible of the willing, a priori.

    LOL I agree with you, the rebound will soon come and "unleashed" will have nothing on its rebound. We have a few years of Gold and Silver good times while the restructuring gets done - by others.

  2. Thanks Peter. I think reducing the leverage allowed in the market will ultimately just put Silver into stronger hands for sustained growth in the price.

    I must admit I was a bit wary of all the conspiracy hype around the margin increases, that was until this recent run of 5 increases over 8 days, raising the margins even as the price of Silver falls.

  3. Note that COMEX will have some immediate competition from Hong Kong now as they have finished their new vault and I guess their Bullion has finally been returned by the UK. This is fantastic news and should / will certainly shift global affairs be more than a few degrees.

    And boy oh boy, is the UK (our Colonial Masters) in big strife.

    Will soon be time to rid ourselves of the Kingdom and develop our republic of Australia - if only we could find some "leadership"?