The biggest slump for silver since 1983 may not be over as the Comex exchange in New York makes it 84 percent more expensive for speculators to trade the metal, triggering an exit by investors.
The minimum amount of cash that must be deposited when borrowing from brokers to open new positions 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. Open interest in futures has tumbled about 15 percent since the exchange began raising margin requirements on April 25.
Prices may drop an additional 14 percent to $34 an ounce by the end of next week from yesterday’s closing price, according to the average forecast in a Bloomberg News survey of six analysts. Silver has more than doubled in the past year as record-low U.S. borrowing costs and a slumping dollar prompted investors to buy precious metals as alternative assets.
“You’re talking about a very volatile market, a very significant run-up in a very short period of time,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio in San Francisco. “It went too high too fast, and exacerbating it on the downside is the increased margin requirements.”
As of April 29, the metal had soared 57 percent in 2011, the most among the 19 commodities tracked by the Thomson Reuters/Jefferies CRB Index. In the past four sessions, silver plunged 25 percent, the most since February 1983. The slump trimmed this year’s advance to 17 percent, trailing gains by gasoline, coffee and gasoil.
“If you have to put up that much more margin, many people simply 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 markets need to correct.”
CME raised margins after “unprecedented high levels of volatility,” Harriet Hunnable, the managing director of metals products, said in a telephone interview from the company’s headquarters in Chicago. Silver’s 10-day historical volatility jumped to 81.19 today, the highest since March 2009. The exchange has announced five margin increases in the past two weeks.
“When markets become highly volatile, and we can see the market anticipates further volatility, then it is highly likely that we will change the amount we require,” Hunnable said. “The exchange increases margins to manage the risk people face.”
Before the increases, margins were about 5 percent of the value of a futures contract, which is for 5,000 ounces. After the plunge in prices, the cost after May 9 would be about 12 percent of a contract, using today’s settlement.
Silver “went up much too fast, and if it continues to go up, that’s disaster,” said Jim Rogers, the chairman of Singapore-based Rogers Holdings, who predicted the start of the global commodities rally in 1999. “I’m very happy it’s coming down nicely. I hope it comes down some more so I can buy some more. Markets are always correcting.”
The metal may reach $45 in the third quarter, said Ralph Preston, a principal at Heritage West Financial Inc., a San Diego company that specializes in futures trading. “At this point, I see some serious long liquidation and profit taking, but not an end to the historic 2011 rally.”
The rally won’t stop “until the Federal Reserve begins to aggressively hike interest rates, the Middle East simmers down, and the U.S. Commodity Futures Trading Commission concludes its multiyear investigation into supposed market manipulation,” Preston said.
Silver futures for July delivery fell $3.148, or 8 percent, to close at $36.24 on the Comex.
Prices touched $49.845 on April 25, the highest since the Hunt Brothers cornered the market in 1980. Futures rallied as investor demand rose, pushing holdings by exchange-traded funds backed by the metal up 24 percent in the past 12 months. Shares outstanding of the iShares Silver Trust (SLV) ETF, the biggest such fund, tumbled 4.7 percent on May 3, the largest slide since January 2008.
Traders who follow options markets may not be surprised by this week’s declines. The ratio of puts per call for the iShares Silver Trust rose higher than 0.9 in April, the highest since December 2008.
Silver reached a record $50.35 in January 1980 as the government investigated the Hunt Brothers’ attempt to corner the market. The brothers were forced to sell off their holdings, and the price collapsed to $10.90 in four months.
Prices may drop as low as $31 by the end of the week before rebounding, said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. On April 28, McGhee forecast $62 by the end of the year.
“Silver is a freight train,” McGhee said. “The market doesn’t change, doesn’t give up. It’s relentless, and you’re just going to get rolled over.”
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