Silver stops triggered bringing a buying opportunity a little closer

Print This Post | Topic: Silver — May 6th, 2011

This sell off has certainly triggered the stop loss orders which no doubt were being moved up in line with the move in silver prices. We have seen many of these sharp pull backs, this one brings a buying opportunity ever closer. As the technical indicators show, from overbought to oversold in a matter of days with the RSI now down to 31.62, the STO is almost on the floor followed by the MACD.

The ECB have kept interest rates unchanged which gave the US Dollar a little boost, which in turn added to both gold and silver’s woes. The charts were sitting in oversold territory inviting some profit taking and throw in “Sell in May and go away’ and the scene turns ugly. The rule changes inflicted on silver prices also played their part and is best summed up by this excerpt from Greg Canavan in Sydney of The Daily Reckoning in Australia:

Silver is a fascinating metal because throughout history is has been a monetary metal. During the late 19th and 20th centuries it was ‘de-monetised’ (via coercion from the US and Britain, we should add). But its unique properties saw it become widely used as an industrial metal. Due to monetary mismanagement by the issuers of paper currencies worldwide, in recent years silver has again come to be seen as a monetary metal. It now fulfils two roles and is hugely important.

– But there is another game going on in the silver markets. To understand what is happening you need to know that, like other commodities, the prices you see quoted every day are set in the ‘paper’ markets. That is, the futures market.

One silver contract represents 5,000 ounces. At say, $40 an ounce, this represents a position of $200,000. But you don’t need to pay that upfront. You put down a ‘margin’ instead. Back in January, the margin set by the CME Group (the owner of the futures exchanges in the US) was $11,138. So to get exposure to $200k of silver, you need to come up with just over $11k. That’s leverage.

– Since late March, the CME has continually increased margin requirements. That’s fine in a rising market because it wants to make sure its not encouraging more leverage as the price of the metal rises. Fair enough.

– But what is truly strange is the CME’s actions over the past few days. It has continued raising margin requirements even as the price falls! Effective 5 May, the initial margin requirement to buy a silver contract is now $18,900, up from $16,200 just a few days before. Then, from 9 May, the margin requirement will increase again – to $21,000!

– At the current silver price of around $35, that represents a margin of 12 per cent. This compares to a margin requirement back in November of just 6.5 per cent.