Silver Investors, Let Me Introduce You To the Futures Market
Silver Investors, Let Me Introduce You To the Futures Market
If you own silver and are listening attentively to all the Johnny-come-lately-experts telling you it is never going to fall, or that the price is going to be $500 in the next 5 years, this note is for you.
Futures Exchanges are not just trading venues. They also have a duty to ensure orderly market behaviour for legitimate commercial consumers of the raw commodities.
Comex has raised margin requirements for silver twice in the last two weeks.
A silver contract has a notional value of $354,800. The initial margin to open a position is now $24200. Last week it was $20,000 and in the middle of the month it was around $18,000.
The amount of money you need to have to open a long futures position has jumped 33% this month. That means that position sizes have to be smaller.
Since the secondary margin has also increased you also need to have more cash on hand to keep a position open. That also makes positions much more sensitive to volatility which forces traders to raise stops.
The important point to understand is futures exchanges can continue raising margin requirements until they deem trading activity has normalized.
The other big event last week was China introduced restrictions on who can export silver.
Here is a section from a related X post by Sahil Kapoor:
What MOFCOM’s official rule says about who qualifies (silver section):
“A new silver producer applying for export qualification must have 2024 silver output ≥ 80 tonnes (can be relaxed to ≥ 40 tonnes in western regions), plus compliance/track-record conditions.”
“Applicants must meet quality/environment certifications (ISO9000 and ISO14000 are explicitly listed for silver producers) and other compliance requirements.”
Buying physical silver is a parlous business. It is typical in China to buy .999 silver even if the majority of silver sold for the jewelry business globally is .925.
When buying for the jewelry business securing metal that is in fact silver and not some alloy of zinc is quite difficult. As the price of silver rises, the incentive for sellers to dilute silver content, even for investment bars, is very high.
Silver prices are up 100% in less than four months. That suggests the risk of adulterating the supply with alloy has risen significantly. That supports the decision by the Chinese government to regulate exports.
If the acceleration in the price head of this announcement was in the expectation that China would limit exports, that is now unlikely to be a significant bullish catalyst.
That suggests the efforts by Comex to curtail speculation are the more relevant consideration now.
It is also important to note that China is not a major producer of silver. It is a major refiner of silver. If it were to curtail exports of refined metal, producers would stop exporting ore to the country.
This is not the same condition as exists in the rare earth sector where China is a major producer of the ore as well as having the refining capacity.
So, what does this mean for the trends in precious metals?
