I know, its a radical title but let me explain.
I read an interesting article tonight, that spoke about margin requirements for commodities trading going up.
At the same time it got me thinking. As margin requirements go up, the commodities market is also facing a shortage of liquidity and a leveraging contraction. What does this mean to you and I?
Well, to trade options and futures you have to have margin accounts. On those accounts you get levered up. So, $1 may get levered up to represent $3, $5, $10 etc of buying power. In a 24 hour period something like 30 billion in precious metals trading occurs. And, we see that the prices might move on average $20 -$30 dollars now. In a leveraged contraction, the levered accounts should move down from 30 billion of available capital needed to move the market, to say 28, 25, 22 or some lower billion number.
Our futures market move the way they do right now based on leveraged buying. As the market deleverages, this means smaller amounts of money will come into the futures and options market and therefore, move it less than 20 to 30 dollars movements we are accustomed to now.
It seems to me, that with a continuation of this, the futures market may become broken and stop "leading" or being the barometer of the spot prices. The spot prices, or physical market prices would logically have to take control at some point.
The only thing that could compensate for the lack of leverage buying in the futures market is if larger numbers of people with smaller amounts of money come into the market to replace the smaller number of people seemingly having larger amounts of money due to leverage. It's an interesting thought.
It will be interesting if faith is lost in the futures because it definately leads the spot prices
Increased margin requirements means LESS money to borrow and invest. It is a negative pressure on stocks, an increase in backing, a decrease in liquidity.
With 11 Trillion disappearing from market value, and the rest cut by 1/3 by margin requirement increases, demand curve nosedives.
I can't see your logic.