CME Groups New Contract Rules for Comex Silver Futures Caused 10% Correction
Silver’s wild ride continues to break records and changes to the capital requirements for the purchase of silver futures on the New York Mercantile Exchange dampened interest in silver, which saw frantic trading at the beginning of the week, analysts say.
Trading in “Silver Futures” reached 319,204 contracts Monday April 25, 2011 — eclipsing the prior record of 201,216 set on Nov. 9, 2010, said exchange operator CME Group Inc. (CME), which owns the New York Mercantile Exchange and Comex. Futures prices jumped up around 8.2% on the day as the contract set its sights on breaching its 1980 record price of $50.36 per ounce.
Meanwhile, the number of open silver contracts, known as open interest, hit a record of 240,344 contracts. The prior record of 235,992 contracts was set on April 21, 2011.
Silver prices have surged 52% this year to around $45 a troy ounce on the back of investor demand for a safe haven from economic uncertainty and currency risk. The precious metal is considered a hedge against these risks, with price-conscious investors often picking silver over gold, which currently trades around $1,500 per troy ounce.
The volatility prompted CME Group to raise margins for “Comex Silver Futures“, effective at the close of trading Tuesday.
A number of options expired on Comex on Tuesday. “It’s possible that Friday and Monday the market tried to push towards $50.00 where there were a lot of call strikes,” Walter de Wet, head of commodities research at Standard Bank, said “But we trimmed it back to $45.00 where there were also a lot of call strikes.”
For speculators in the benchmark “5,000 Ounce Silver Futures Contract“, the exchange is raising the initial deposit required to purchase a contract to $12,825 from $11,745. Additional capital needed to keep the contract overnight will increase to $9,500, from $8,700.
Much of the intra-day spike on Monday that drove prices towards $50.00 was driven more by algorithmic and electronic systems trading on momentum than by market fundamentals.
Silver prices rebounded Wednesday April 27, 2011 — before Bernanke’s news conference, following a 10.5 percent crash in Tuesday trading, but analysts were not convinced the rally would carry the metal much higher.
For the short term, a collapse in the price of “Silver” looks unlikely, according to analysts. “The one thing that would really threaten [the current high prices] would be if Bernanke comes out and says something quite aggressive about how they’re going to tighten liquidity in the States,” said Credit Suisse’s Kendall.
Silver jumped 6 percent Thursday April 28, 2011 — on the back of dollar weakness after Federal Reserve Chairman Ben Bernanke’s remarks Wednesday, but some analysts doubt the price can hit and stay above the $50.00 mark.
If you look at “Comex Futures“, the market doesn’t look extremely over-stretched and you can make the argument that there is still physical demand. However, the cost of production of the metal remains low at around $18.00 per ounce — if a lot of production comes online and silver remains industrial-driven, we could see a fallback below 30.00 per ounce for the precious metal.
Fallbacks in silver tend to be quick — if you look at it from a fundamental supply and demand view, you have to have a significant investment component to keep it above $50.00 per ounce.
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