CME Group Announces Money and Margin Requirement Increases

Posted at 7:37 PM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

CME Group today announced a hike in the amount of money or margin needed to control a full-sized (5,000 ounces) silver contract. Margin for silver jumped to $6,500 from $5,000 or 30%.

Several things to know about this:

First, it is quite common to see this occur in markets that are undergoing sharp upmoves in price. The increasing price range can easily wipe out the entire margin amount in a single day with ease and this is designed to protect the integrity of the clearing houses and the brokerage firms. Customers who lose big cannot oftentimes meet margin calls and end up sticking the brokerage firm with losses. The idea is that the firms protect themselves by having more money at the clearing houses sufficient to cover potential losses.

Second – members of the exchange generally tend to be on the short side of a market moving higher and once they get trapped, they begin to squeak, and quite loudly at that. Squeaky wheels get the grease and since the exchange membership brings with it voting rights, they generally get what they want.

Thirdly – Small specs whose accounts are generally underfunded to begin with and who chase the markets higher based on the hype end up buying at relatively high levels. Once the margins get raised, these weak hands get forced out since they generally cannot meet margin calls and their exodus precipitates a wave of selling. That engenders more paper losses which then engenders more margin calls and the snowball effect occurs.

Fourthly – strong hands on the long side will look to add on during such price retracements when it appears that the bulk of the weak-handed latecomers have been flushed out. Stronger hands on the short side who have been experiencing severe bleeding of their trading accounts will welcome the opportunity to finally cover some of their existing shorts in an attempt to minimize the amount of damage that they have incurred. Getting out with a small loss after sitting through a huge one is a psychological victory for trapped shorts.

Fifthly – to believe that the bull market in the metals is now over and that gold in particular has topped, is to also believe that the US Dollar is about to somehow mysteriously repair itself in spite of the conditions that have been contributing to its recent decline. Gold is acting as a currency and will remain one. It is no longer trading as a commodity. Severe stress in the global monetary system assures that it will be well supported.

Sixthly – the breakdown in the long bond is signaling that the market is fearful of inflation ahead. Gold and silver are your protection against such conditions.

Summary – trading gold and/or silver is a vastly different thing than investing in either or both. Traders can get whacked if they do not respect what leverage can do to them and their trading accounts. You are playing with the big boys now and need to learn to be careful and avoid becoming complacent or overconfident about your existing positions. Failure to do so means immense pain. If you must trade, then use very short term time frames such as 5 or 15 minute charts to move in or out.

Investors who buy the metals as a hedge against the Dollar can be much more long term focused and tune out the short term gyrations of the markets. This is what we have been warning about when we said to expect increased volatility. It works both ways going up and going down.