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 trade silver futures will rise to $21,600 per contract after May 9, CME Group Ltd., Comex’s owner, said Wednesday. 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 another 12 percent to $34 an ounce by the end of next week, 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 CRB Index. In the past three sessions, silver plunged 19 percent, the most since February 1983. The slump trimmed this year’s gain to 27 percent as of yesterday, making it the second-best performing raw material, trailing gasoline’s 35 percent jump. Futures fell 1.8 percent to $38.665 by 5:35 a.m. in New York.
“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,” said 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 79.39 Wednesday, the highest since March 2009. The exchange has announced margin requirements four times 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.”
Margins have been increased as silver prices soared. On Jan. 21, the margin was $11,138 and the silver price was $27.427 an ounce. By May 3, silver was up 55 percent at $42.585 while the margin had increased 45 percent to $16,200.
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 Brother’s attempt to corner the market. The regulator forced the brothers to sell off their holdings and the price collapsed to $10.90 in four months.
Other commodities have had similar price declines. Sugar dropped as much as 14 percent on Nov. 12 after ICE Futures U.S. raised margins. The sweetener dropped as much as much as 23 percent in the two days to that date. Cotton slumped as much as 32 percent in the three weeks through April 28 in New York trading.
Silver prices may drop as low as $31 by the end of the week, said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago.
“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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