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Silver Wheaton Corp. Message Board

  • sez_me_man sez_me_man Nov 10, 2010 12:29 AM Flag

    Jim Rickards explains margin change

    November 9 (King World News) There's been a lot of buzz about today's price action in gold and silver. Beginning with the Monday push upwards based on the Zoellick op-ed in the Financial Times, the market surged upward through most of the day today and then hit a serious air pocket with gold falling 2% and silver falling almost 5% in a short period of time late in the trading day.

    On a technical basis, there's nothing surprising about that; we've seen similar moves before and I expect to see them again. The overall trend has been upward with higher highs and higher lows. The market seems to find a strong bid at progressively higher levels even after sharp corrections. Nothing too disturbing there and nothing to indicate that primary trends are not still intact.

    What was noteworthy was the catalyst for the pullback, specifically an increase in margin requirements for silver futures contracts. There was no comparable change in gold futures margin but as often happens in markets there was instantaneous contagion from silver to gold notwithstanding the different circumstances. Again, no surprise that the markets correlate to a great extent even when the news only affects one market or the other.

    This is a pointed reminder to the readers and listeners of King World News and something we have discussed before. Most markets consist of two parties, the buyer and the seller. But in futures markets there's a third party in every trade which is the exchange and more specifically the rule making bodies and margin setting panels on each exchange. They act not in the best interests of buyers or sellers but in the best interests of the exchange itself and its statutory duty to maintain orderly markets. Of course, the word "orderly" can be in the eye of the beholder. What may be an "orderly" price spike to a long may be a "disorderly" rout to a short. Either way, the exchange has the last word. They have many tools at their disposal. They can increase initial margin (what you put up when you open a contract) increase the frequency of variation margin (make you post intra-day instead of end of day) and require "trading for liquidation only" which means longs can go short and shorts can go long but no one can expand a position or increase the open interest. Finally, an exchange can suspend physical delivery and allow offsets and rolls only. All of these rules have been invoked many times and will be again.

    Invariably the parties disadvantaged by these moves complain that the exchange is "changing the rules in the middle of the game". That's a naive and pointless perspective. The fact is that the ability to change the rule is itself a rule. The exchange is not changing the rules, they are just utilizing an alternate set of rules that are already in place. Traders should stop complaining and read the rule book. It's all there.

    What is more intriguing is what motivates the exchange officials to use these rules? Is it truly a disorderly market (the usual reason) or is it part of a larger coordinated effort involving Federal regulators and policymakers to do whatever it takes to push up prices of risky assets such as housing, stocks and junk bonds and push down prices of safe-harbor assets such as gold and silver?

    The point is, when buyers and sellers transact in futures markets, they're never alone. Exchange monitors are always looking over your shoulder. Never ignore the power of the exchanges and regulators and always remember they will use this power when it suits them, not you.

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    • I don't remember them doing this when oil rocketed to $160. Weak argument in my opinion and only goes to show the hand of JPM/HSBC.

    • So much for free markets in America.
      Their manipulation, whether in the rule book or not, will eventually cause traders to position themselves in markets outside the USA. Because out markets, including the stock and bond markets, are no longer bastions of free capitalism. It's a rigged game.....and guess who ita's rigged for..

    • Can you imagine a baseball game in which the runners get trapped in between the bases because the umpires yell stop? or the foul lines get moved in and out? Or the homerun line gets moved in and out? Or worst case an outfielder is to catch and immediately drop the ball to get an out. In otherwords, if he holds on to the ball the runner is safe.

      • 3 Replies to stockaphobe
      • Fed has no exit strategy from QE. A 2% drop in avg value of assets on balance sheet => bankruptcy

        “Right now the Fed’s balance sheet shows about $57 billion in total capital. Current assets are about $2.3 trillion. The current money-printing plan will take total assets above $3 trillion. At that level, it only takes a 2% decline in asset values to wipe out the Fed’s capital. Put differently, it only takes a 2% drop in the average value of assets on the Fed’s balance sheet for the Fed to go bankrupt. And this is in an environment where various markets frequently go up and down 3% in a single day.”


      • I'm intrigued that Rickards doesn't offer a suggestion as to why we're brainwashed to believe real money: gold & silver are "risky assets".

      • This is classic manipulation by (YOUKNOWWHO). Anyway filling up at $3/gallon on no oil issues goes to show you that we are going to $4/gallon and then another stock market crash? Silver will hold it's value through it all, but the SLW might have a little bit of jerking around if indeed the market plunges to 6,000 again? Anyway if red inflation flags such as the HUGE increase in gas are going up anyone with half a brain should know the actual value of silver is definitely worth the $28/ounce. The more they manipulate it the more flags will go up to anyone with half a brain that they should be buying more silver. Anyway I might sell all my shares in the stock market in everything stock related after going through September 2008 + The flash crash it's just too craZy.

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