Last week the big headline grabbing market development was the plunge in silver prices on the heels of a hike in the margin requirement for the futures contracts. There were loads of news stories about how that increase in margin drove prices lower.
Hope you didn’t actually believe that.
Here’s the deal. The only people forced to close out positions like those in silver when there’s a hike in the margin requirements are folks who are highly leveraged. Guess who that is? Hint, it ain’t the big traders and institutions. Who does that leave? You got it, the little guy who’s trading positions too big for his account in the first place. These folks don’t represent a significant portion of the market.
Want proof? Take a look at the open interest (OI) in the front-month silver contract. If there was a massive liquidation we’d see OI plunge. As the chart below shows (red line), though, front-month OI has only drifted lower, which is what it normally does when the contracts roll as they did the week before last.
So why did silver fall so far so fast? Because it went up too far too fast and the margin hike gave folks an excuse to sell. Take a look at the green Average True Range (ATR) line. Even before the market tanked, ATR was already well higher than it’s been in years. That tells us of a market getting very frothy, that’s subject to a reversal.
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