Wednesday, May 4, 2011

1, 2, 3, 4... I declare a paper war (Updated 2)

For almost two weeks now, I have have told you to expect a great deal of volatility in Silver and that we would be in for a wild roller coaster ride.

Closer to home I have cautioned many colleagues that I expected a huge beat-down of Silver at some point which could see the price brought down as much as $15 - $30 per ounce. Is this that beat-down?

I was convinced that event wouldn't come until the broader investment community started to move significantly into Silver. 

That hasn't happened yet.

Has it come early because the short squeeze on the COMEX is even greater than we think?

Or is this, as the naysayers are trumpeting, simply a bursting of bubble conditions in the precious metals?

The fact of the matter is that Silver is down dramatically this week.  From almost $49.80, the shiny metal is now hovering around $39.35 after dropping to almost $39.

So is the bubble bursting? Or is there another, definitive reason that Silver has dropped so dramatically in price?

If you have any doubts about what's going on, ask yourself two key questions:
  1. Why did you originally believe Silver was going to rise exponentially in value?
  2. Have those reasons changed?
Let's look at them.

Silver was going to rise exponentially in value because of increased demand as a result of Sovereign Debt. Have the answers to any of these issues changed?
  • Has the US suddenly resolved their deficit woes? 
  • Has the US federal government found a way to avoid raising the debt ceiling of $14.3 Trillion?
  • Has the U.S. government discovered spending restraint and move toward a balanced budget?
  • Have the individual US States resolved their massive debt funding issues? Are California, Illinois, New York, Michigan and about 30 other states suddenly solvent and prosperous?
  •  Has the US found a way to fund the outstanding liabilities of Social Security, medicare, etc which bring the actual debt totals to over $70 Trillion?
  • Has the massive derivative problem been solved?
  •  Did the too big to fail banks suddenly become solvent, their CDOs and loan portfolios truly valued at par?
  • Has Europe become solvent or have Portugal, Iceland, Ireland, Greece and Spain suddenly resolved their severe debt problems?
  • Is China suddenly buying US Treasuries again?
  • Are the world's Central Banks buying up more US dollars or are they still dumping US dollars to buy Gold?
  • Has the COMEX suddenly sourced 1 billion ounces of physical silver, tested and ready for immediate delivery (because they sold that many paper contracts on Monday)?
NOTHING has changed.  None of these conditions have been altered.

If fact, conditions are quite the opposite.  Reuters is reporting that the US Treasury wants a $2 trillion debt cap raise just to keep government operations going until the end of 2012. Meanwhile the budget deficit hasn't been resolved, so government revenue can't operate on the cash that is coming in... therefore that debt can only be added to after 2012.

Unemployment remains stubbornly high. Various budget constraints have limited the scope for easy solutions, even if these were desirable. The debt and deficit dynamics are bad and deteriorating at both state and federal levels. A major rating agency, Standard & Poor's, has already taken the previously unthinkable step of placing the US's AAA credit rating on negative outlook.

There there is this Bloomberg report that came out today reporting that Mexico, Russia and Thailand added gold now valued at about $6 billion to their reserves in February and March as the dollar weakened and Treasuries lost investors money.

Which brings us to the main contradiction... if the bubble is bursting in Gold and Silver, why isn't the US dollar rising?

The fact of the matter is that Silver isn't dropping in price because the underlying support for it's dramatic rise has collapsed.

Silver is dropping in price because an all out paper war has been launched against it in a desperate attempt to suppress it's value and support the US dollar.

We have already talked about how, in the last week of April, the COMEX attempted to engineer a liquidation of silver holdings by those who trade with highly leveraged positions.

And you need to understand that this represents a significant amount of trading.

During that week the COMEX raised margins on Silver traders twice... first by 9%, then by another 10%... in just one week!!

Unable to meet margin requirements when trading opened on Sunday night, delinquent accounts were liquidated. It just so happened that trading in London was closed for a local May 2nd holiday... which meant trading volume was very low. In about four minutes, Silver plummeted $6.10.

This was followed on Monday by MF Global raising their silver trading margin to 175% of the COMEX margin.  More liquidation's were triggered.

On Tuesday the paper war intensified as Interactive Brokers warned traders of a yet unknown (but certainly scary) looming margin increase:



Wed May 4 10:50:37 2011 EST

Margin Increase: Silver Derivatives

In light of the recent unprecedented volatility in silver markets, the exchanges that offer trading in silver derivative contracts are increasing the margin requirements on these products. In an effort to adequately address the inherent risk resulting from this volatility, we are increasing margin requirements on silver derivative contracts to a level exceeding that which the exchanges are implementing.

You will be notified as more information becomes available.

Please monitor and manage your risk accordingly.


What the margin hike's have done is it has forced all the newcomers to the game to have to liquidate their positions or ante up the new margin. Given that most trade futures on margin, liquidation is the only option. For long time Gold/Silver investors, these tactics are reminiscent of the actions taken to suppress Gold/Silver in the late 1970s.

You have to keep this in perspective. No asset has risen so sharply so quickly without meaningful and necessary pauses in price to establish a new base. Even gold, during its run paused now and then to allow for normal ebbs and flows to take place, new bases to form and new launching pads to be built.

Silver didn’t do that. It shot straight up like a rocket. That rocket, thanks in large part to the CME margin hikes has now run out of fuel for a spell.  Will Silver crumble? No way. The fundamentals as to why it ran haven’t changed. The reality is that it just ran too fast with everyone scrambling to try to buy physical or find a vehicle to play the game with.

This is another reason why junior mining stocks have not taken flight like the price of Silver. Rather than being a bad thing, the juniors have been a shield from the recent volatility and risk of the futures market.

In truth, these margin actions are ultimately beneficial to the ability of Silver to push higher and higher.

In the meantime you are being presented with an outstanding buying opportunity.

Remember... the key question to ask yourself is: what has changed?

It isn't the Sovereign Debt issue, that's for sure. Which means this take down can only reverse sharply when it's done.  And that is going to present us with a gift-wrapped buying opportunity.


The paper war continues.  The CME has just announced that margins have been raised for the 4th time in 8 days.  This latest hike is 17%!!!


Not only has the CME hiked margins for the 4th time in 8 days, but closer inspection of their announcement (see above) reveals that there are actually TWO rate hikes in the announcement.  Rate hike #4 is effective May 5th and rate hike #5 is effective May 9th.

Two concurrent margin hikes are a move never implimented before.

The paper war continues.
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  1. And they just did it again.... 4 times. How many can they do???? When will it not make any further difference... and why the HELL am I not in line up at the VBCE?

  2. The criminals are rigging all the markets, but the people are discovering what they do, via internet and talk radio, they will be caught and jail for what they do. Remember the French revolution!!

  3. Thanks, blog updated to reflect this 4th margin hike.

  4. From now on they will do absolutely anything to save them self, but its to late.

  5. Here is the commentary from Bob Chapman.

    I dont know if Im learning anything, getting ahead, just along for the ride.... but, DAMN, its interesting.

  6. Okay.... so the second one will effectively be priced in immediately, but will push off those wanting to get back in... meaning, it will stay near 38 or so for the next few days. Should bounce after that to 45 or so (im not looking at the charts here)... and then, because everyone knows that this is a paper thin sham... there has got to be a follow up somehow. But, will it matter even. Intuitively, it feels like the cats out the bag... but, I suppose the right players could have some fun smashing it down.

    Still, Im wondering if it was a good idea having sold my car and buying all that silver last Friday after all.

  7. I have been posting the contrarian view re. silver.
    It is okay to have some PMs in your portfolio..mostly GOLD if you must. (Not now though)

    But silver, what were you thinking?..WTF

    For the simple reason that it is so open to manipulation. An idiot I know, not unlike some here, sold some very valuable assets to buy silver.

    BTW, I have been the investment circles for more than 30 years

  8. ^ Sorry to hear you're in a rut with your investing. You've arrived at a great blog though. We'll all figure it out together!

  9. "^ Sorry to hear you're in a rut with your investing. You've arrived at a great blog though. We'll all figure it out together!"

    You would not say this if you were even half my age in experience. Go ahead buy some more (silver). ..Geez

  10. Oh, I will do. Indeed, I shall. As far as your behaviour goes, you have offered nothing of any value yet, and have lied about your experience. Have fun on the streets buddy. You can probably sell some of that 18 y/o ass if you get hungry.

  11. $36.06 now....US dollar jumping up ..when should I jump back in?

  12. $35.91 now!!!looks very steep on the graph.I wait and watch til next week I think.

  13. ...BTW, I have been the investment circles for more than 30 years ...
    95% of news letter writers on economics have been wrong for the last 5 years regarding gold and silver, you are one of theme. More than 100% profits in the last 10 months! I am leaving to Cancun next week! Thanks silver!