Why Silver Margin is Raised


Silver margin is raised to ensure the financial integrity of the silver market. Unlike the equity market, margin in the commodity space is a misnomer. Initial margin is considered a down payment on the full notional value of the contract. (5,000 ounces x the price of the contract).

Commodity futures exchanges set the margin (in this case the COMEX), not any government entity. Margin is not raised to dampen speculator involvement. Most professional commodity traders allocate only between 8 – 12% of their overall assets to margin, so an increase will not cause any type of liquidity squeeze on them or force liquidations in an otherwise strong bull market.

Looking at the chart above, the purple line shows volatility as measured by the 20-day Average True Range (ATR), a popular indicator of volatility measurement. As you can see, volatility has doubled from $1.05 on April 4 to approximately $2.20 as of today. Since silver is standardized at 5,000 ounces per contract, that means that the average swing in one’s equity has risen from about $5,000 per day to over $10,000!

To put that in perspective, an account with $1,000,000 in equity that held just 1 silver contract would see an incredible 1% volatility in the account. That is staggering.

The volatility accelerated since the reversal in silver that occurred on April 25. That is why the margins have been increased. The bump in margin rates were affected well after silver began to sell off. To suggest otherwise is either a conspiracy theory or an instance of causality.

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