May 26, 2024

How the COMEX Crashed the Silver Market

By the close of trading on Wednesday, May 4th, the silver market had experienced significant selling pressure that drove prices down by 17.3% from Thursday, April 28th.  This sell off corresponded exactly to a series of increased margin requirements by the COMEX  for trading silver futures contracts.

Silver traders who may have been apprehensive about additional margin increases did not have long to wait.  After the close on Wednesday, May 4th, the COMEX announced two huge additional hikes in silver margin, effective at the close of business on Thursday and another hike effective at the close of trading on Monday, May 9th. As of Monday, initial contract margin requirements would be increased to $21,600 and to $16,000 for hedgers.  A year ago, when silver was trading in the $18 range, the margin requirement for a speculative contract was only $4,250.

The rapid series of five margin increases by the COMEX resulted in raising initial margin requirements for speculators from $11,745 to $21,600 – an increase of 84%.    The margin requirements for hedgers also increased by 84% from $8,700 to $16,000.   Silver futures traders would now be forced to come up with huge amounts of additional cash or liquidate holdings on price weakness.   The collapse in silver prices on Thursday May 5th, triggered by the COMEX margin increases, indicates that many players were forced to liquidate positions.

The actions taken by the COMEX constitute a perfect text book example on how to crash a market. The non stop increases in margin requirements resulted in a dramatic reduction of liquidity in the silver market by forcing out small speculators who were not prepared to commit additional cash for margin maintenance.  As prices fell in response to the COMEX margin increases, bigger players in the silver market were forced to liquidate positions to avoid margin calls and large losses on leveraged positions.

The last two margin increases by the COMEX, after silver had already declined by over 17%, created the perfect crash scenario.   Silver traders liquidating positions to meet new margin requirements caused a further cascade of forced selling and the silver crash became inevitable. The elimination of liquidity from any market will result in falling prices and the COMEX knew this.

If someone wanted to crash the silver market, the moves taken by the COMEX were perfectly designed to accomplish this by reducing liquidity at a time during which the markets were already stressed from previous margin increases. The result was a collapse in silver prices from $48.70 to the $34 range.

In response to the outrage over the devastating series of margin requirement increases, Kim Taylor, President of CME Clearing, which owns the COMEX, issued a statement explaining CME’s actions. According to Ms. Taylor, margin increases are related to risk management and done to prevent default by clearing member firms.  Margins are adjusted based on market volatility and are not designed to move a market or discourage investor participation.  Among the factors considered in setting margins is a CME calculation of a worst case scenario for possible portfolio losses.

Specifically regarding the margin increases on silver futures, Taylor stated that “we have made several changes in recent weeks to adjust to volatility in the marketplace…Our interest is in providing security for the entire market – no matter which way it moves”.

CME’s statement seems disingenuous at best.  The protection they speak of is not for the benefit of investors, but rather for the benefit of CME and clearing house members.  The actions of the COMEX in implementing a rapid series of margin increases, even after silver had already steeply sold off, resulted in large profits to short sellers and reduced risk for CME at the expense of huge losses for silver investors both large and small.

A slower series of margin increases would have seemed more appropriate to address price volatility.  The CME knew or should have known that its actions would severely limit liquidity in the silver market.   The decrease in liquidity caused further market volatility, requiring more margin increases, which in turn crashed the price of silver. Anyone looking into the great silver crash of 2011, can start by looking at the COMEX.

Did JP Morgan Jump or Were They Pushed?

JP Morgan has “quietly reduced” their short silver positions. So is this going to take off the block on the silver market?

In the short term then yes it will, but it is probably a good idea to be a bit wary, even while accepting that silver has a good way to go up.

So what was the issue with JP Morgan?  In essence JP Morgan had what was known as “naked shorts” which means that JP Morgan was essentially selling what it didn’t have.  JP Morgan would sell you forty pieces of silver, or whatever, in three months time in the hope that the silver price would go down from the price that was agreed. If the price went down then JP Morgan would make a small profit as you didn’t exercise the option that it sold you.  If the price went up, you’d make the profit and JP Morgan would make a loss.  This is fairly standard practice.

The problem that JP Morgan had was that they sold a significant market moving amount of silver options.  This was, so some more excitable silver followers claimed, lowering the price of futures which meant that the current price of silver could not help but be affected.  It also put JP Morgan into a tight spot as they were in beyond their means.  There were so much silver futures that JP Morgan would not be able to redeem it all meaning that it would have to scramble in the markets to buy the silver, meaning that it would be bankrupted.

Well that doesn’t seem to be happening.  This looks like part of a staged withdrawal, orchestrated by the major players.  The first step was a rise in the required margins on the options, which meant that all players had to have more silver on their balance sheets before playing with margins – and so cutting some of the frothiness out of the market.  This is stage two.

JP Morgan was sailing far too close to the wind, even if they were not going to go bankrupt, and this quiet withdrawal means that their losses are real but limited.  So there will not be that sudden spike as JP Morgan is held hostage by holders of physical silver that many silver bulls were expecting.

Silver is a really good inflation play, as well as being a reasonable industrial metal.  In the long term its fundamentals have improved thanks to the excitable statements being safely out of the way.

Gold and Silver Recap: Silver Price to $50?

Another Precious Week

Usually we start this column with some guff about gold.  And then after talking mostly about gold we may hit the other metals.  Let’s face it, gold is usually the most exciting metal there is.  If the world collapses about us, we will be using gold as the currency that helps us rebuild civilization.  And after all, what could be more exciting than that.

But the real action has been in the silver market.  Not all up, it must be said as silver took a real pounding on some days, but there’s some real excitement that J.P. Morgan may be about to bite it on silver.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,375.25 -28.25 (-2.01%)
Silver $28.79 +0.05 (+0.17%)
Platinum $1,673.00 -45.00 (-2.62%)
Palladium $737.00 -21.00 (-2.77%)

Gold-Silver Ratio: 47.77 (was 48.83)

First let’s look at some history.  Bunker Hunt and a few friends tried to corner the silver market by buying silver and buying silver futures.  They drove the silver price skywards, to a level that’s not been reached since.  Then the authorities did some dirty tricks with the silver futures contracts, the price of silver fell, and everyone brushed themselves off and got on with life.

Now J.P. Morgan has been accused of doing the same thing, but in reverse.  Instead of buying silver they are selling it short, that is they are selling it now to buy in six months time.  They have, it has been alleged, sold far more silver than they can possibly have.  This has meant that the rise in the silver price is going to kill them if we all buy physical silver.  You see, someone may want to see all this silver they’ve been sold, and then J.P. Morgan will have to buy it and up shoots the price.

The core idea here is that the gold silver ratio is ridiculously high.  Historically (going back to Biblical times) it has been 16:1, now it is around 48:1, although this week it fell quite fast.  A return to historical norms would mean that silver would get to $87 per ounce.

So there’s some correction that’s due.  Now, this doesn’t necessarily mean that silver has to go up.  There could be a new paradigm, or if not, the correction could be postponed for a very long time. If the correction does happen, then it could be that gold would go down to around $500 – where it was only a few years ago.

Gold could keep going down, but there’s enough uncertainty and inflation to suggest that it won’t get all the way to $500 per ounce.  The correction could be delayed by decades or muted, but the collection will come.  You could still lose money betting on it.

Silver Market Correcting or Crashing?

Despite predictions of the silver market’s strength, prices fell from an impressive 30 year high of $30.68 recently. As of the today, COMEX silver futures have fallen about 7% from their recent peak

Likewise, the silver ETF experienced a similar fall in higher volume. From its intraday high of $30.00, it has fallen below $28.00 on higher volume.

It seems like, for the moment at least, silver prices are falling. Will they rise again? And why?

Strong Holdings vs. Falling Prices

In reality, the news is conflicting. After all iShares Silver Trust is the world’s largest silver backed exchanged traded fund and it has just reported reaching an impressive record. On the 7th, it announced that holdings had reached a record 10,941.34 tons, up from 10,816.69 tons on the 6th.

The question is: has silver regained its strength? Is the market simply correcting? Or are we about to experience a major collapse in silver prices despite expert predictions of strength and growth? In any case, how should investors respond to its new movements?

Silver Shortage?

In the end, the best thing investors can do to protect themselves is to simply be careful. Its important to be mindful of the many pressures that the market is under, as well as the predictions of its potential long-term growth. Silver has been sold past the point of availability and as a result significant shortages of the physical metal are developing.

This is in part due to attempts at manipulation that have recently begun to turn on the manipulators. Companies that have traded silver futures in an effort to keep prices low are now being stressed by the rising investor interest in silver. As a result it seems clear that the short-term silver market is about to get truly exciting.