What happened today in no way indicates normal PM market prices. All PMs shot up, except silver, which was shot down. I understand that there have been three "margin hikes" this week, for silver. That has effectively prevented it from keeping pace with rises in the other PMs. Can somebody provide a "for dummies" explanation of what is going on, and why a margin hike suppresses the silver price so effectively? I have a very difficult time understanding this stuff.
"Buying on margin" means buying something with a partial payment only. In the stock and commodity markets there are specific margin requirements for various purchases. The lower the margin rate, the more someone can buy with the same investment amount. For example, if the margin rate is 50% and silver is at $25, then for an investment of $12,500 you can purchase 1000 ounces of silver. If the price of silver then falls to $24, you would face a "margin call" of $500, in order to bring your debt down to the $12,000 maximum for 1000 ounces of $24 silver. The basic theory is that you are betting on a price increase, and when you sell, say at $30, your profit is greater because you had more ounces than if you had been required to put up the full price of your purchase in the first instance. Brokers, of course, charge interest on margin accounts. The reason a "margin hike" or increase in the margin rate depresses the price is simply that it compels the buyer to come up with more money for the same quantity. That means demand drops, and in a free market that change in the supply/demand situation means lower price. It was a margin call of some $100-million which brought down the Hunt Brothers a little more than 30 years ago when their attempts to corner the market collapsed after it pushed silver to ~$50! Probably my college econ professor explained it better than that, but it's the best I can do more than half a century later!
Let's say you have a brokerage account with a company like Fidelity or eTrade with $100,000 of your own cash in the account. You then can apply for a "Margin Agreement" between you and the brokerage firm. It's basically an agreement that they agree to lend you money at a certain rate of interest but you can only buy "marginable securities" with the money they lend you and you must have a certain percentage of those securities bought with your own cash. The securities noted above could be a stock like Apple (AAPL) ... or a Silver Fund (SLV) If the "Margin Requirement" of a security is 50%, you could then buy $200,000 worth of that security with your $100,000 in cash. The other $100,000 that you used to buy additional shares of the security, you actually borrowed from the brokerage firm. At the end of the month the brokerage firm will subtract the "margin interest" you accrued. When the dust settles and you sell everything, the brokerage firm will take their $100,000 back along with the interest you paid them over the time period. So basically using margin is like borrowing money to invest and it magnifies your gains (and losses). When a brokerage house "raises the margin" on a security from say 50% to 70%. You cannot buy (or hold) as much of the security on "margin". So in the case above, if they raised the margin requirement on SLV from 50% to 70%, you could only buy 1.42x (100/70) of the security instead of 2x (100/50). So if you had $200,000 worth of SLV in your brokerage account, but only $100,000 of your own money, you would have to sell $58,000 worth of your SLV to bring your holdings of SLV down to $142,000 to comply with the new higher margin requirement. So you can see whenever they raise the "margin requirements" on a security -- a lot of SELLING of that security follows (and all the selling makes the price drop) so that people are in compliance with the new higher margin requirement. Clear now?
Thanks, hontonai. I am starting to get it. Is this really price manipulation? I guess they didn't do it with gold, which begs they question, why not? It rose a whopping 30 per ounce today, while silver fell. Honestly, I hate anything having to do with Wall Street, because I really feel it's all a rigged game, with Wall Street as the "house". The "house" always has the clear advantage (except when Donald Trump owns the casino, yuk yuk).
Thanks, too, WingedLiberty. I have always been dim-witted with anything related to math. An increase in the margin prompts an increase in the selling. In the long wrong, can you tell me: Is this healthy in the long run, since it appears to be price manipulation, or is it just price manipulation?
price manipulation is not really the right term ... it's more a measure of how leveraged people are in their investments raising margin requirements reduces the amount of leverage people can have and probably ultimately leads to more stable prices but in the short run, raising margin requirements makes prices drop (sometimes drastically) as people sell to meet the new margin requirements.
By price manipulation, what I mean is, expected outcome (price decrease) after a specific action (margin hike). And now I'm wondering if "speculation" is related to all of this. Is the same thing happening in the oil market?
Margin can be a powerful way to increase wealth (if you guess right on which way prices are going) Let's say you KNEW that silver was going to triple from $16 to $48 and you had $100,000 to invest with a margin account you could buy $200,000 worth of silver with your $100,000 in cash after silver triples in 6 months, your account is worth $600,000!! So you sell all your silver You pay the brokerage house the $100,000 you borrowed (along with the interest paid (perhaps another $3000)) and you keep $497,000 So you turned your $100,000 in cash into $497,000 in 6 months (dont forget to pay taxes on the gains!)
Now lets say you guessed wrong You have $100,000 to invest and with the margin account you can buy $200,000 worth of silver but you bought silver today at $48 an ounce let's say in 6 months silver dropped from $48 all the way back down to $16 (oh no!) So your $200,000 in silver is now worth only $67,000 So you sell it all However you still owe the brokerage house $103,000 So your $100,000 in initial cash is GONE ... and you owe the brokerage firm another $36,000 time to sell your house or declare bankruptcy Margin amplifies your gains and losses ... so it's higher risk for sure!
The margin is usually determined by the interest rate the brokerage or commodity exchange themselves have to pay and the volatility of the stock or commodity. Silver has had an enormous volatility and such has had the margin changed often. This protects the brokerage or exchange from being caught too much on the wrong side of a trade, and is not manipulation , because the increase in margin is known several days in advance to the players, and on the commodity exchanges sites where few amateurs visit. Gold has had a relatively low volatility, and thus less margin changes. When you have a margin account, you have to be aware of how close you are to the edge, so you are not forced to sell into a bad market if a call comes. Also you can't withdraw cash from a margin account until the account is clean ( nothing on margin). I keep at least one non margin account for cash storage/movement. You never know when you need cash quickly Jim
What is "That"? Are you thinking "VIX" for insurance against volatility, or insurance against "margin calls"? I know that my broker doesn't give much leeway on margins calls, says in writing one signs, that they do not have to give warning of increase, do not have to contact you, ( but says they will try), can pick and choose what they sell to fill, and no mention of any institutional or private insurance for margin accounts. And that is fine with me, I may be old, but my mind can still do the math Jim
I think I have gained enough information to be generally aware of the whole margin hike scenario. Thanks to all for the clarification, input, and examples!
