Many of you may look at the price of silver this morning and be alarmed. We took a huge hit overnight on top of some selling Friday as well. It's rather simple what is happening really so I'll keep this short.
I've told you all before that the closer we get to the point where lack of physical silver meets the point of excessive trading on margin, things will get chaotic. There is a lot of doubt that JP Morgan and the other bullion banks will be able to deliver all the physical metal that traders are demanding. There are also traders that are moving in on the trade because they know that there isn't enough physical silver to meet demand. Their hope is that they can get a 20-60% or more premium for basically forcing a default by the bullion banks. If the BB's don't have the metal they have to pay a premium to contract holders, it's a default. Simple. People are wondering when the "Comex will default....". Everyday.
The bullion banks have ammunition in their arsenal to battle these "speculators". They can raise the margin requirement. As it stands, any of us could place an order for a 5,000 oz contract on the Comex, the Globex, or Think or Swim or any other trading platform. 5,000 oz x $50 is $250,000 worth of silver. But trading with margin only requires you to put down maybe $11,000. So you could trade 5,000 oz's with $11K. Nice huh.
Now imagine if you own 100 of these contracts. You pony up $1.1 million and get to trade 500,000 oz's of silver, or $25 million worth.
And now also imagine that your trading platform, unexpectedly announces that they are raising the margin requirements. Instead of needing $11,000 to buy a contract you need $30,000. And you have to pony up immediately. It's not many people who are able or willing to come up with $2 million that quickly. They might have it, somewhere, but not in cash. So basically what they do is they force a huge wave of selling.
So what's happened......? Let's read this short piece from Zerohedge and get some clarification, shall we?
Think Or Swim Hikes Silver Margin To Double That Of CME
Submitted by Tyler Durden on 05/01/2011 23:29 -0400
On Friday we reported that MF Global hiked silver margins to roughly $25k per contract (following the CME's own two consecutive margin hikes of 9% and 10%). On Sunday night, not letting any public hysteria go to waste, Think or Swim follows suit and hikes the /SI margin to $30,037.50 and $6,007.50 for the /YI. At this point there is an outright scramble to get anyone with margin out of precious metals positions, which of course in the long run will merely reinforce the holding hands.
These margin requirements are signs of desperation. Nothing more, nothing less.
We are in the midst of turbulent times my friends. The very nature of the monetary system of the world is changing before our eyes. I cautioned a while back they we will see big pull backs like this. Do not question if you have erred for you are on the right path. History and sensibility are behind you; the wind in our sails. I assure you many will use this as a buying opportunity to buy physical. That will simply exacerbate the problems that the bullion banks (BB) are having with trying to provide silver to the markets. We will have this chaotic to and fro until we don't. And when we don't, not many of us will be able to afford silver anymore. Of any quantity anyway.
I suspect we'll see a quick rebound as traders are over reactionary and don't really know the silver story. We'll see if JP Morgue and the bullion banks have any more tricks up their sleeves. They will want to ride this momentum Monday morning and force as many hands out as possible. The most likely thing they'll do is push some news that will be dollar positive. One reason I suspect this is gold has not pulled back much.
Fasten your seat-belts!!!!