The biggest slump for silver since1983 may not be over as the Comex exchange in New York makes it84 percent more expensive for speculators to trade the metal,triggering an exit by investors.
The minimum amount of cash that must be deposited whenborrowing from brokers to trade silver futures will rise to$21,600 per contract after May 9, CME Group Ltd., Comex’s owner,said yesterday. That’s up from $11,745 two weeks ago. Openinterest in futures has tumbled about 15 percent since theexchange began raising margin requirements on April 25.
Prices may drop another 12 percent to $34 an ounce by theend of next week, according to the average forecast in aBloomberg News survey of six analysts. Silver has more thandoubled in the past year as record-low U.S. borrowing costs anda slumping dollar prompted investors to buy precious metals asalternative assets.
“You’re talking about a very volatile market, a verysignificant run up in a very short period of time,” saidMichael Cuggino, who helps manage $12 billion at PermanentPortfolio in San Francisco. “It went too high too fast, andexacerbating it on the downside is the increased marginrequirements.”
As of April 29, the metal had soared 57 percent in 2011,the most among the 19 commodities tracked by the Thomson ReutersCRB Index. In the past three sessions, silver plunged 19percent, the most since February 1983. The slump trimmed thisyear’s gain to 27 percent as of yesterday, making it the second-best performing raw material, trailing gasoline’s 35 percentjump. Futures fell 1.8 percent to $38.665 by 5:35 a.m. in NewYork.
‘Frothy Market’
“If you have to put up that much more margin, many peoplesimply say ‘no, I won’t do it,’ so they liquidate,” said Dennis Gartman, an economist and the editor of the Suffolk, Virginia-based Gartman Letter. “It got a bit frothy, and frothy marketsneed to correct.”
CME raised margins after “unprecedented high levels ofvolatility,” said Harriet Hunnable, the managing director ofmetals products, said in a telephone interview from thecompany’s headquarters in Chicago. Silver’s 10-day historicalvolatility jumped to 79.39 yesterday, the highest since March2009. The exchange has announced margin requirements four timesin the past two weeks.
‘Highly Volatile’
“When markets become highly volatile, and we can see themarket anticipates further volatility, then it is highly likelythat we will change the amount we require,” Hunnable said.“The exchange increases margins to manage the risk peopleface.”
Margins have been increased as silver prices soared. OnJan. 21, the margin was $11,138 and the silver price was $27.427an ounce. By May 3, silver was up 55 percent at $42.585 whilethe margin had increased 45 percent to $16,200.
Prices touched $49.845 on April 25, the highest since theHunt Brothers cornered the market in 1980. Futures rallied asinvestor demand rose, pushing holdings by exchange-traded fundsbacked by the metal up 24 percent in the past 12 months. Sharesoutstanding of the iShares Silver Trust (SLV) ETF, the biggest suchfund, tumbled 4.7 percent on May 3, the largest slide sinceJanuary 2008.
Traders who follow options markets may not be surprised bythis week’s declines. The ratio of puts per call for the iSharesSilver Trust rose higher than 0.9 in April, the highest sinceDecember 2008.
Hunt Brothers
Silver reached a record $50.35 in January 1980 as thegovernment investigated the Hunt Brother’s attempt to corner themarket. The regulator forced the brothers to sell off theirholdings and the price collapsed to $10.90 in four months.
Other commodities have had similar price declines. Sugardropped as much as 14 percent on Nov. 12 after ICE Futures U.S.raised margins. The sweetener dropped as much as much as 23percent in the two days to that date. Cotton slumped as much as32 percent in the three weeks through April 28 in New Yorktrading.
Silver prices may drop as low as $31 by the end of theweek, said Frank McGhee, the head dealer at Integrated BrokerageServices in Chicago.
“Silver is a freight train,” McGhee said. “The marketdoesn’t change, doesn’t give up. It’s relentless, and you’rejust going to get rolled over.”
To contact the reporter on this story:Yi Tian in New York atytian8@bloomberg.net
To contact the editor responsible for this story:Steve Stroth atsstroth@bloomberg.net