Has Silver Found Support After Its 27% Fall?

David Stendahl called me about Silver last week.  A quick glance at the chart showed a major price drop.


110507 Silver 
How major?  Well, after the big move up.  Silver dropped over 27% last week, the most since 1975.

Technical traders will note that Silver was running into resistance at the 48.12  Fibonacci level.   A week later, Silver is now resting at the 34.66 … which is also a Fibonacci support level.  Stendahl points out that the Value Chart indicator has formed a pivot bottom suggesting that Silver is ready to find support.  Traders will likely keep a keen eye on whether Silver can stay above the 34.66 level … otherwise, the selloff continues.

In This Case, Technical Analysis Doesn't Tell the Whole Story.

According to MarketWatch, retail buyers may have stayed invested in silver long after most hedge funds and other large investors had left.

Data from the U.S. Commodity Futures Trading Commission shows money managers’ bets that silver prices would go higher declined starting mid- February, when silver prices started to climb in earnest.

The trend suggests the so-called ’smart money,’ the large managed funds that report to the CFTC, had started to back away from silver and "retail investors picked up the slack,” said Tom Pawlicki, a precious metals analyst with MF Global in Chicago.

The CME Group, which operates the Nymex, had raised its margin requirement for speculative traders twice last week due to high volatility. These investors must now put up $14,513, per contract, for a day trade, and a further $10,750, per contract, to hold that contract overnight. Both requirements are up 24% from a week ago. For investors holding hundreds of contracts, that's a difference of hundreds of thousands of dollars.

Silver is much less costly than gold, but gold's margin requirements are less than half of silver's. The higher margins are a deterrent to new investors looking to enter the market.

Apparently, to manage its exposure during the parabolic move higher (and the shift from 'Smart' to 'Dumb' money), MF Global (which is one of the big Futures trading houses) raised its margin requirements significantly higher than the CME did.  MF Global, run by former Goldman CEO Jon Corzine, hiked its silver margin to $25,397. Consequently, MF Global's margin requirement is 175% of the CME's requirement.  The result … a rush to exit.

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