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Is Silver Being Manipulated? Or, Are Investors Being Protected?
Two weeks ago silver was in the midst of its greatest rally in 30 years - up 170% in 12 months and 50% in just 4. It was flirting with $50 an ounce and billions were pouring into the silver market. Its gains were tripling that of gold.
What a difference a week can make.
Silver has, quite literally, collapsed in value - down over 25% in 5 days. Statistically that marks a bear market for silver (a 20% to 30% decline in the market is considered a bear market...statistically speaking of course). So the question is: Why did this happen? Why such a viscous drop in such a short period of time?
Silver, by nature, is a volatile metal, one of the most volatile commodities there is, but that had nothing to do with this drop. Granted, its rise to superstardom was quick and sharp (look at the 6 month chart for silver above), but there were real fundamentals behind that rise - it was deserved. It wasn’t all speculation and people buying out of fear like the bears want you to believe.
(Read my report on silver in January 2010 to learn more about the fundamentals and why we favor it over any other metal: http://www.pinnacledigest.com/blog/aaronh/why-silver-plethora-reasons-2010 )
The real and not so real factors causing silver to drop...
The first factor I’ll mention, which added to silver’s drop, was US special forces finally putting an end to the world’s most wanted man’s life. Bin Laden’s death sparked a rare buying surge into the US dollar on Monday as a renewed sense of American optimism spurred. To see that maggot brought to justice was a great thing for the world and we are all safer because of it. However, does the US dollar deserve to rally because of it? Not really. The fundamentals behind the US dollar are horrible and this will be a temporary blip on the radar. Lest we forget the debt ceiling in the US that needs to (and will) be raised shortly.
All the major commodities went down by default after the assassination of Bin Laden, solely because that’s what they do when the US dollar rallies. It wasn’t real fundamentals causing the drop in silver (or most other commodities). It wasn’t even real fundamentals behind the rise in the dollar - it was simply an emotional rally that brought in emotional buying for the dollar.
Perhaps the only commodity that had any reason to drop (fundamentally) because of Bin Laden’s death was oil - given that there is a $20 premium on its price thanks to the dangers and unrest in the Middle East and Africa.
So Bin Laden’s death was no excuse for silver to drop such a large amount. Don’t believe the media hype.
The truth of the matter as to why silver dropped so much (and why it continues to get hammered) was due to the fact that the CME Group (owner of Nymex) increased margin requirements for those trading silver. I was watching the Asian markets last Sunday evening and noticed silver was down nearly 8% - I couldn’t figure out why. This was hours before Bin Laden’s death was made public, but shortly after the margin requirements changed (as I later read).
Oddly enough, this didn’t make the mainstream media until the next day when everyone began asking questions. It’s as if they didn’t want us to know. On top of that, this past Thursday the CME Group announced the fourth trading cost increase in 11 days. It is said this was done to protect against extreme volatility.
Protect against extreme volatility by putting in a policy which was certain to destroy the price of silver? Our team found this strange.
According to Tatyana Shumsky of the Dow Jones Newswires “Speculators in the benchmark silver contract will have to put up $18,900 per contract to open a position, and maintain $14,000 of that to keep the contract overnight, according to the latest round of margin hikes that take effect at the close of trading Thursday. At close of business Monday, the initial margin will jump to $21,600 per contract, of which $16,000 must be maintained to keep the contract overnight. Monday's increase will be the fifth time CME has raised trading costs in 15 days, taking them up 84%.”
Naturally this spurred a sell-off in silver as traders headed for the exits, not wishing to come up with the capital for the increased margin requirements. And as we all know, buying begets buying and selling begets selling. In this case, the early sell-off due to the margin requirement change caused an outright panic sell-off in silver and shortly after, several other commodities (none as bad as silver however).
Now, thanks to the new margin requirements, investors, both institutional and retail, have a bitter taste in their mouth towards silver. Not because it lacks in solid fundamentals, but because of a new trading policy put in place. Imagine the chaos a 25% drop in 5 days would have created if that were to have happened to the broader markets... it would have been nuts. They would have never allowed such a policy to be implemented on trading stocks as a whole - only to commodities and the hottest threat to fiat currencies at the moment, silver.
It looks as if the powers that be are attempting to even the playing field. The Fed has lost control of its ability to influence investors with its words. Investors want action. Despite the Fed telling the public that inflation is in control and not out of control, investors continued to dump dollars in favor of commodities faster than ever - sending silver on a meteoric rise and the US dollar into a free fall. This is scaring the Fed and any nation whose reserve contains significant US dollars. The more popular silver and gold become, the less popular the USD becomes.
Eric Fry explained it well “For example, recent trading volume in SLV, the $13 billion ETF that represents holdings in silver bullion, has been exceeding the trading volume in SPY, the massive $89 billion ETF that represents the S&P 500 Index. Prior to the recent silver frenzy, SLV would produce only about one quarter the daily trading volume of SPY. But now it is SLV's trading volume that routinely tops SPY's!”
If the new policies implemented by the CME on trading silver wasn’t enough, they’ve now changed the rules on trading oil. Yesterday’s headline read “CME Widens Oil Price Limits”. Jamie Coleman of Forexlive, stated “Traders are scrambling for the exits as the CME raises its price limits on a number of contracts by 200%, CNBC reports.
If you thought “limit down” in crude was $10 bucks today, SURPRISE!, They’re now $20 bucks…Oil accelerated losses after the move and is now down $10.62.at $98.63.”
Wow. The CME had a busy week trying to change the way investors trade two of the most popular and fastest growing (in price and volume) commodities out there. Coincidentally (or not) silver and oil are two direct trades against the US dollar. Hmmm.
I believe this to be a significant blow to commodities (specifically oil and silver) over the next couple weeks. It will likely slow the pace at which silver rises when it does finally get back on track. However, fundamentals are fundamentals and this will not keep silver down for long. Volume in trading silver has been light during this collapse. I’ll be looking for volume to pick up again before thinking about entering the silver trade (as to determine where support will set in). I suspect to see tremendous support in the $30 area. If it makes it that low, I’ll take it as a gift from the CME Group. Despite these setbacks, I believe silver will set a new high within 12 months and finally crack through $50 an ounce.
Have a great weekend,
This article represents solely the opinions of Aaron Hoddinott and not of PinnacleDigest.com nor Maximus Strategic Consulting Inc. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations.