Has the silver bubble burst?

About a month ago, I was watching it yo yo a bit and it seemed then that the bottom was solid just above $34. We saw a spike that was reversed by the increased position requirements for margin buyers. This was done specifically to cool the market and stop rampany speculation. Is thios a correction ? Maybe. But the market looks healthier now than it did. IMHO

gary

 

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Silver is really falling in early trading this morning.

 

Looks like all precious metals are down this morning.

 

They can raise margin requirements up to the point where no leverage at all is allowed. It is their market, and they can set the rules. There can never be a default on delivery since the market allows cash settlement. The Wiki article is correct, but this is on purpose to try to provide liquidity to a thinly traded market.

Sorry but I just disagree the market is the bad guy, and if we all just hope or try enough we can make the market go away. Silver is an imperfect commodity to try to price, and if we didn't have the CME it would be a much worst market to try to invest in, and most of the external money in the market today would go away because of those flaws. Its a case of be careful of what you wish for. How would we price silver without a market like the CME? How would you price your purchases or sales? Would you know $40 the dealer is charging is fair?

Just my opinion.

Chris

 

If a company goes into the futures market to purchase silver to keep their plant operating, and on the delivery date they receive cash in place of physical silver, that is the definition of default.

 

But is the market allows it, then its not a default. Only if the contract states that settlement has to be in physical delivery would I view it as a default. If the firm goes into a market knowing this, but they physically need the silver, then they should view the CME as not a source for their silver. They should physically hedge.

I am not saying this is not making the market worst off, as many may now do exactly as I described and not use the market for their future hedging. I simply view a default as doing something not allowed for in a contract. If you make contract that prohibits X, and you do X, then youa re in default. If you make a contract that allows X or Y, and you deliver Y, you are not in default. I am not an expert in this market, but my understanding is they now allow for cash settlement. Well that fact precludes most forward contracting then, if you cannot count on the physical silver. It makes the market less useful.

 

My understanding is that if you purchase one silver futures contract on the long side for delivery on a specific date, and notifiy the exchange that you intend to take delivery and pay the associated warehouse and insurance fees, then someone has to deliver the 5 1000 ounce physical good for delivery bars. They can't come along with the cash equivalent and walk away no harm no foul. It's a zero sum game. Some players will buy offsetting contracts to close their positions, but if someone is holding their contract at the delivery date, then another party is obligated to deliver. Perhaps you are thinking of interest rate futures where settlement is routinely in cash.

http://www.investopedia.com/terms/d/default2.asp

 

This is true but there is a big IF to this. When you buy (long) a contract, it is always to a specific supplier (short). There is nothing preventing that supplier, who doesn't have the silver he sold you, to offer up the cash + a big premium to you instead of taking physical delivery. Most people will gladly sign up for this as it eliminates the headaches of physical delivery.

 

If someone needs the silver to keep a factory running or needs the metal to cover other positions, they may not want the cash. The silver may not be a headache to them. Then it would constitute a default in fact if not in law.

 

This is true, the only part you left out is that a significant period before the delivery date, you will be asked to deposit into your account enough funds to cover the complete price of the silver ( any margin would be eliminated). At that time you can decide to cash in your margined contract or trade it so you need not do that. The extra time allows the CME to insure that there will be physical silver available on the delivery date, certain fees will be charged. Even them some companies may find that their need for silver has decreased, and may sell their contract before the delivery date. You can't change your mind after not delivering the full cash value by the CME assigned date, and change a then margined contract ( only good for cash delivery ) to a full contract ( delivery of metal).

I would love to see a confirmed event of the CME not delivering a physical contract after all rules and dates were followed, as I don't believe they have occurred.

Similar to the above, it you are selling contract, at a certain date you will be obliged to either seal the silver for delivery, or sell or trade the contract away to cancel the delivery. You may have to pay a premium or may receive a premium from someone to accept your contract.

The CME doesn't wait until expiration date to "hope" thing work out even. As I understand the CME future rules.

Jim

 

Thank you for what you wrote. I agree with what you said, but I don't work in the business or trade futures so I didn't do as well describing the process. I was just trying [unsuccessfully] to point out that if the buyer does everything they are required to do to take delivery, the seller will be in default if they can't come up with physical silver. I've read about some contracts being settled in cash for very large premiums [on the order of 50%+ over spot] but I don't know if they were forced, voluntary, arranged, or mediated in some other manner to avoid the dreaded "D" word. I tried to search for the article but could not find it.

 

As far as silver spot goes, I am thinking 35 is the new 20. TC