Silver may get the headlines but the semi-precious rise and fall is just part of a global commodity crunch.
The contagion has run from silver (-30 percent-plus off highs) and crude (-15 percent) to the leading economic indicator industrial metal, copper (-16 percent). The slide may have caught institutional traders somewhat off-guard but, as is often the case, it was retail investors -- long gold, silver and crude via the GLD, SLV and USO ETFs and other vehicles -- who bore the brunt of the losses. We know the dollar was a contributing factor, but somewhat behind the scenes was a hike in margin requirements by the CME (owners of the NYMEX where commodities are traded). This was arguably the cause of a cascade of selling where traders hit every bid available to close out long silver positions.
Was the margin hike unfair, who got the news first and what's the lesson in this for individuals? In an effort to get to the bottom of this murky chain of events, Breakout invited Danny Riley and Steve Eubanks of MrTopStep.com to explain. Fair warning: The answer isn't apt to make anyone feel better.
The CME steps in when assets start going parabolic in price, according to Riley. The ostensible purpose is to reduce the "risk" in a marketplace by forcing traders to decrease the amount of leverage used. In other words, traders have to put up more actual cash to be long, decreasing the threat of bulls not having the cash to pay up if their trade goes wrong. In more plain terms, the CME forces the price down by creating mandatory selling. A prick awaits every bubble, and the CME seems to be holding the needle on silver.
It's not just silver. Margin requirements were also hiked for oil. Now, the CME didn't just start manipulating commodities. Informed traders knew the risk going in and caveat emptor is rule one of trading. The bigger question is how the information gets distributed. In other words, do professional investors have an unfair edge over individual investors.
In short, yes, institutional investors do have an edge over individuals. An enormous edge. This week the CME increased margin requirements for crude, again to quell speculation by driving the price lower. According to Eubanks off camera an intra-day alert was sent out by the CME announcing an increase in margin requirements by 25%. Who did the CME notify? Members of the CME. Yes, it is literally a membership only alert when the CME announces margin hikes.
Sure, the press picks up on the news of a margin increase in short order. Individuals taking positions in commodities should absolutely stay abreast of developments. No, nothing changes the fact that distributing material non-public information to select individuals absolutely, unequivocally, gives CME members on the mailing list an actionable trading edge. Inasmuch as the CME typically steps in to "reduce the risk" of parabolic commodity moves, retail investors long the commodities who get second hand news aren't just "at a disadvantage." Retail investors last to know about a margin hike are raw meat being thrown into a trading pit of voracious carnivores.
There will be no action taken against the CME. Frankly, I don't think there should be. The CME is acting to control the risk present in their markets. That's what regulators do. What's more, the spike in silver was going to end in a thud. That's why we repeatedly warned viewers to be careful drinking the silver Kool-Aid. All of that said, the ones left holding the bag on commodities were the non-professional everyman investors and pension funds too large to move.
Food for thought the next time the more mainstream media get sucked into the hyper-publicized convictions of Wall St. Evil-doers: If you're going to get screwed on your holdings, you may as well know who's doing it.
We want to know what you think. Comment below, or write to us at Breakoutcrew@yahoo.com.