I’ll Take More on Margin Please
By: John Fisher Margin. Margin has been appearing in the precious metals news a great deal lately. Margin affords an individual (or institution) the opportunity to control a significant amount of gold or silver with very little money. If prices go way up, you make a boatload. If prices drop precipitously, you lose your shirt. Many new, as well as experienced metals investors are discovering margin for the very first time. Their demeanor is “I’ll take more margin please.”
The Chicago Mercantile Exchange (CME), which owns the COMEX, recently raised margin requirements an additional 21% on gold and 16% on silver. This past April alone, when silver dropped 25%, the CME raised margin requirements 5 times in 15 days resulting in an 84% margin (cash) requirement increase.
Increased margin requirements effectively force the most highly leveraged speculators to liquidate, as more cash is required to maintain their positions. We have witnessed this over the past week as there has been a rush to the exit door for all non-physical speculators.
Many, if not most, physical metals investors would scream “manipulation” when the CME raises margin requirements. It appears as if the CME is attempting to cool off the market and drive down prices by forcing speculators to pony-up more cash. But, when you think about it, as commodity prices rise more margin (cash) should be required to control the same amount of (paper) gold and silver – in this case a futures contract
Higher prices dictate higher margin – as it should. The new margin requirement on gold contracts of approximately $8,500 equates to just over 5% of the notional value of the futures contract. This is in line with historical precedents.
The good news is that physical buyers are not subject to margin calls. Physical gold and silver requires no prospectus; they have no counter-parties, no offsetting liabilities and no default possibilities when held personally or in an insured depository.
All Things Considered – John’s Commentary
Recently, silver prices dropped approximately $10, and gold $300. Do we physical holders like it? No. But do we lose sleep? Absolutely not. We know that prices will come back even stronger, and we are now being given the opportunity to add more to our holdings at bargain prices.
How about the paper investor and leveraged speculator? They may have lost sleep at a minimum, or were completely cleaned out at worst.
Quote of the Day: The man who speculates is soon back to where he began…..with nothing. Ecclesiastes 5:13-15, TLB
