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Monday, May 9, 2011

Looking For The Silver Lining


Effective after the close of business Thursday, the CME Group Inc.'s (NasdaqGS: CME) initial margin requirements, which is the minimum amount of cash that must be deposited when borrowing from your broker to trade silver, will be increasing to $18,900 per futures contract, up from $16,200(on 5/2). This is a huge increase from about a year ago when the margin required was $4,250. This latest margin hike is the fourth in less than two weeks and as I am hearing it they are announcing another hike for Monday(5/9) to $21,600, which would be the 5th in 3 weeks. I can understand why the CME would raise margins with silver flying as raising the margin is used to remove froth when things get out of control, but this is becoming ridiculous. The CME is acting like a cornered wild animal, lashing out at anyone or anything to make its escape.

Raising margin is usually done in markets that are going up at a rapid clip and yes they do cause a decline in the market, that is the point a control mechanism. Of course this begs the question with silver already having declined 20% over the last few days what is the purpose of adding yet another margin increase or two unless they are deliberately trying to drive the price down to the basement. This is starting to smell pretty fishy and surely not transparent. There is no doubt in my mind that there are a things going on behind the scenes and once again all the little guys are taking it on the chin.

I believe we should have transparency in markets but that surely not the case in virtually all markets of the casino these days. Sure one can try to stick their nose behind the curtain to see, not the man but the men that are pulling the levers of the market, but you are constantly told do not pay attention to the man behind the curtain, much like when Dorothy and her friends meet the Wizard in the “Wizard of Oz”. At least in the Wizard of Oz Dorothy can plainly see the man behind the curtain and she opts to listen to the admonishment of not paying attention to him, we on the other hand are told there is no man behind the curtain, yeah right.

If you are investing in the commodity space particularly in silver you kind of feel like the butt of the joke in the short lived comedy series starring Leslie Neilson titled Police Squad (a precursor to the “Naked Gun Series”). In one episode there is a chalk outline at the scene of a murder and standing there are three people at a police barricade and a cop with a megaphone blasting 6 inches away from their faces. The cop is telling the people “nothing to see here…move along” which is exactly what the powers that be would like to have you do.

This series of margin raises is suspicious for the reason that there are so many in rapid succession, it appears like a deliberate effort to rescue someone or some entity. I did not put any credence to the rumors on the internet before regarding JP Morgan (NYSE: JPM) and purchasing silver to force the bank to cover their massive short position, effectively causing a bankruptcy situation. After watching what the CME is doing with margin begs the question of there is some truth to that rumor and crossing $50 was the breaking point for JPM or one of the other massive shorts.
So why has the CME opted to raise the margins yet again effective at Thursdays close? It appears to me for a couple reasons. First, the CME group who has traders as voting board members are opting to save themselves from their massive short positions that they know without changing the rules would get severely hurt by their prior hubris. These masters of the universe don’t like to lose money and to make sure they can cover they are stacking the deck in their favor. As far as an exchange is concerned I do believe that they should act in a manner consistent with making a market not protecting their own from arrogance, greed and or stupidity. It is mind boggling to me that the CTFC does not stand up and take notice after all they have been investigating the silver market in particular. It appears that like the SEC the CTFC turns a blind eye to all the chicakery and blatant manipulation going on in the markets.

Secondly, it is coincidental that these margin raises came in rapid succession after the metals started moving due “B52” Ben Bernanke’s FOMC dog and pony show. In Bennie’s answers came the notion that the FED wishes to keep rates low for the foreseeable future and that any inflationary pressures are just transitory. Based upon the market participants reaction during and after Bennie’s performance it was obvious to even the dimmest bureaucrat that the public was not buying the message the FED wanted.

While the FED does not control the CTFC I am sure that they have major influence over them or have friends in high places that do so they may have additionally been instructed to induce a sell off in commodities and silver\gold and oil are the most visible signs of inflation. The oil market is very large and deep and would be very difficult to influence as it is global. The silver market by contrast is tiny and there for can be driven up or down with much less firepower. With the level of skittishness in the markets these days all it takes is driving one sub-sector down and you can effectively throw a wet towel on the entire market. This phenomenon is a result of general nervousness arising out of the fact that the vast majority of market participants are both financially and economically illiterate, so they group think and scramble haphazardly when something occurs, like roaches when the lights get turned on at night.

I could accept the first couple margin increases by CME as reasonable since silver was approaching $50 on a space shot trajectory, but now with the fourth I am beginning to feel as if Tony Soprano is running the show. In essence the CME is using or abusing, depending on your point of view, its power to knee cap lots of investors for the benefit of “the family business”.

In a sense I am beginning to feel like Columbo putting together the scene of the crime. Let’s start with this past Sunday evening (4\28) when the CME Soprano’s put out a hit on Silver. It was the perfect crime as the cops (the Asian buyers) and the other Families (IE the London Boyz) were all out partying as their exchanges were closed for holidays. Add to the mix that trading opens Sunday evening in the spot market and it is thin enough without having some of the participants absent. Under normal circumstances it does not take that much volume for the Boyz to push things in the direction they wish, so Sunday’s market was completely at their mercy. At the same time the announcement came that Bin Laden had been killed, which was like throwing gasoline on a fire for this market, as if now all the risks economically and politically had been removed nullifying precious metals appeal.
The media would have you believe that the drop in silver in particular was linked to Bin Laden since threats of a slowdown in China or various mining issues around the world were unable to derail the silver express. The media is grasping at straws and the people who buy what the media sells also believed in the 2nd half recovery and a plethora of other wishful thinking scenarios.

What happened on Sunday was a deliberate and directed operation against mainly silver and secondarily gold. Looking at what was hit on Sunday only silver took the brunt. If this was related to slowdown worries how come base metals, softs and oil were unscathed? If it was because terrorism has come to an end with the death of Bin Laden how come oil did not sink and only silver? Moreover, the old fall back of the inverse dollar correlation did not explain things at all since during this raid the currency aka the Dollar did not rise.

This all has the tainted smell of an operation to try and get out of having to deliver metal that they are short on because under contract they could be forced in to producing the metal. I believe that this an effort to get as many people to puke up ounces to help one of the Boyz, because they know on this coming May 27th, notice day, that deliveries are going to be requested. The more the media parades out experts that state there is no shortage or tightness the more I think there is one building. While the FED uses the Management of Expectations principal otherwise known and MOPE the CME, CNBC along with Timmy “Turbo Tax” Geihtner went to the Joseph Gobbles School of tell a lie often enough and it becomes truth.

Along these lines today I happened to have CNBC on in the background, something I rarely do, but the entire morning was spent slamming silver in particular and parading out supposed experts one after another to declare it a bubble and that it was parabolic. One guy came out and discussed how the I-shares silver trust (NYSE: SLV) traded more than the SPX one day and that this was proof of a bubble. In my mind it was proof that someone was getting squeezed and was panicking and the more they panicked the more buying came in, creating a feedback loop. Of course CNBC spent an inordinate amount of time trying to convince all their viewers that inflation that market correctly perceived was coming as of “B52” Ben’s FOMC meeting was all wrong and had magically dissipated as well. I find this amusing as some of the key drivers for silver and gold are the debt, debt ceiling debate and the federal budget. There is no fiscal responsibility or restraint in Washington at any level but today this is magically not an issue. If you want to talk about bubbles they should be talking about debt and spending bubbles that are clearly unsustainable. To prove the point of no restraint Timmy “Turbo Tax’s” treasury department was featured in an article today pushing for congress to raise the debt ceiling by $2 Trillion as a stop gap measure as to carry things through the election. A trillion here a trillion there and pretty soon you will be talking about real money, yes real monopoly money.

It should seem to you dear reader that the focus is getting clearer and all the machinations around silver are clearly designed to shake loose as many weak hands as possible to allow the Boyz an escape route as they are all “to big to fail”. Yet again John Q is taking it in the neck for the Boyz.

I am not here to debate the “bubble” of silver or gold as I do not subscribe to that sentiment, but silver due to the ferocious short squeeze was on an unsustainable path and the initial margin increase and possibly even the second one was sufficient to alter the course and prevent a blow off top. In my opinion CME has gone too far and runs the risk of not only increasing volatility because of much fewer participants but also being relegated out of the price discovery business when buyers around the world figure out the game is rigged and they have infinitely more control of their destiny in the physical market. The CME may have unwittingly limited their ability to control the price in the longer run. In many respects the silver market needed this pause to put it on a more sustainable path as painful as the adjustment may be for late comers. What the CME is doing is in essence price suppression and just like run away blow off tops end badly compressing a spring doesn’t work well either.

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