Silver has been the strongest precious metal since the lows of 2008 & has gained 249% since its low of $9.05 an ounce on Oct. 27, 2008. Gold has gained only 137% and the gold to silver ratio has dropped from 77.1 ounces of silver to buy one ounce of gold to its present level of 51.93. Silver has fared better due to its extra role as an industrial commodity as well as a precious metal, while gold mainly acts as a precious metal which anticipates and reflects economic uncertainty & inflation growth.
After raising margin requirements for silver futures contracts eight times last year, the CME Group has decided to lower margins yet again, after having last lowered them on February 13th, with initial margin for speculators reduced from $24,975 to $21,600 and maintenance margins from $18,500 to $16,000. Hedgers and members margin was reduced from $18,500 to $16,000. Comex silver stocks have started to build this year to the highest in at least 10 years. Despite the official position taken by the CME Group, that they have no intention of influencing the market with their margin requirements, the fact is that by making positions harder to maintain, an influence on the market is inevitable.
According to Kim Taylor, President of CME Clearing, in a document published by the CME Group entitled “Understanding Margin Changes”, she wrote that margin requirements “aren’t a means to move a market one way or another, or to encourage or discourage participation from one kind of market participant or another.”
Taylor added that, “margins are not set to dampen or heighten volatility, but rather to provide the clearing house and clearing member firms with additional layers of financial resources to lessen the impact of price swings.”
Last year’s margin requirement hikes increased the cost of holding silver futures positions by 80% and was one of the key factors contributing to silver’s sharp decline last May. On April 16th, margin requirements for COMEX 5,000 ounce silver futures contracts were reduced from $21,600 to $18,900, while maintenance margin was lowered from $16,000 to $14,000. Members of the exchange and traders denominated as hedgers margins were reduced from $16,000 to $14,000.
How raising margins affected the silver market last year?
In a two-week stretch when a seemingly un-ending upside volatility in silver pushed it to a high of $49.51 per ounce on April 28th – 2011, the CME Group raised margin requirements five times, causing an 84% rise in trading costs. The move was an important factor in the subsequent slide in the price of silver.
On April 25th, margin requirements for a 5,000 ounce silver futures contract were $8,700 per contract. On May 5th, the CME Group raised margins to $14,000 per contract from a previous increase to $12,000. On May 9th, they raised initial margin to $21,600 and maintenance requirements to $16,000.
Since the CME Group has allegedly been a part of the ongoing manipulation in the metals market, it stands to reason that the margin hikes last year were part of a concerted effort to bring metals prices down. If the price of silver begins to rise sharply, it is most likely that margins will probably also increase.
Strong investment demand pushed silver prices higher amidst volatile market trends and attain an all time record annual average price according to World Silver Survey, 2012, released by the Silver Institute. Despite significantly higher silver prices, total fabrication demand posted its second highest level since 2000, while retail silver investment demand for both physical bullion bars and coins & medals surged to record levels, according to the Silver Institute survey. Silver World Investment produced another historic high total last year of 282.2 million ounces, the equivalent of approximately $10 billion on a net basis, itself a record high.
Physical silver bar investment grew by a massive 67% in 2011 to 95.7 million ounces, while global coins & medals fabrication rose by almost 19% to an all-time high of 118.2 million ounces. Western Europe and the United States, which bettered 2010’s record performance in terms of American Silver Eagle Bullion Coin sales, led this category to its record high. Elsewhere, strong demand in China accounted for a near 60% rise in its bullion coin output last year.
Global silver ETF’s holdings in general proved to be quite resilient last year, with a relatively modest drop of 4% to 576.1 million ounces at end-2011, in spite of marked volatility in investor trading elsewhere. In particular, even though 2011 saw a notable growth of 53% in Comex silver futures turnover (in terms of the annual average), net long positions on Comex ended last year down 73%.
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