Silver crash: The COMEX margin trick and Soros rumors worked well

The silver price in US dollars experienced a very sharp fall back of over 30 percent within 4 days, after climbing very fast to record levels at close to $50 per ounce - a move that is nothing new as it happened several times during the massive bull run of the past 10 years. Silver is now at the same level were it was 2 months ago, which is still a 100 percent higher price than it was last year.

After reaching a 28 year high at $49.80 per ounce one day after Ben Bernanke's speech on April 28, the US dollar price for silver fell by a whopping $15 dollars within 4 trading days, to $34.54 per ounce. There were media reports citing leaked information from the Soros Foundation, of all places, saying that Soros would be selling. This triggered some people to sell, but there is another big factor at play causing the drastic crash of the dollar price of silver.

David M. Arcobello, Senior Precious Metals Trader at International Bullion Exchange, commented on silver's crash this week: Silver no doubt had gotten ahead of itself. But fundamentally, nothing has changed. Bernanke's comments were dovish, interest rates are staying low, oil prices are hampering the consumer. The Fed is between a rock and a hard place.

But there is actually one important thing that changed last week, and that is the cost of holding speculative positions in silver futures at the worlds largest future exchange COMEX. CME Group Ltd. said this week that margin rates would rise for the fourth time, increasing the minimum amount of cash that must be deposited when borrowing from brokers to trade silver futures on the Comex 5000 to $16,200 per contract from $14,513 at the close of business on Monday. Jamie Greenough, Futures Representative at Global Security Corporation, commented that, while margin adjustments are something usual, it is extremely rare and aggressive to adjust margins again only 2 days later. But the CME even increased margins even 4 times within one week, and very steeply by a total of 84 percent as well.

It is well known from history that speculative run ups in prices can be broken and reversed by sudden increases in the cost of buying and holding leveraged positions, which is done by increasing interest rates or margin requirements.

David Arcobello agrees that this is a major driver of the sudden slump in prices: The main reason for the crash is the increase of margins for silver futures by the CME group since last week. But another factor is contributing to the slump.

The big story is that large institutional investors started selling during Sunday night, which is clearly visible looking at the chart, where it suddenly falls by some 10 percent in early Asian trading. Those investors, including some hedge funds, decided that silver had gotten ahead of itself and liquidated huge amounts of silver, unloading large quantities of physical silver as well. When retail investors become aware that well known names are dumping silver you're going to see some follow through selling pressure as we've seen.

I agree that silver was due for a correction, but this extreme move is just completely overdone and we are nearing capitulation. I expect bargain hunters to begin scaling in.