This should be no surprise, as silver has a long history of being an extremely volatile asset. Since the beginning of the year, silver has been up as much as +38% — a much larger increase in price compared to the run-up enjoyed in silver's more expensive cousin, gold, which at peak price this year has only hit +11%.
Though some have justified silver's recent run as a return to the historical silver-to-gold ratio of 16:1, others such as famed commodity investor Jim Rogers had warned as recently as April 27th that silver was in danger of "going parabolic."
Silver had been rising on fears of inflation and dollar depreciation. Silver rose sharply following chairman Bernake's speech last week, and S&P's decision to downgrade US debt earlier in the month. The announcement of the death of Osama Bin Laden coincided with the recent silver sell-off and may have prompted the move as investor confidence in the US increased.
Recent margin hikes, too, may have contributed to the precipitous decline enjoyed by the precious metal. In the last two weeks, the CME has hiked margin requirements four times, most recently increasing the cost of a 5000-ounce silver contract by 33% effective today (May 5th) which has led to a 2% decline. A fifth margin hike has already been announced for May 9th, setting the margin requirement to 11% of the contract value.
Current silver margin requirements are more than double gold's margin requirements. Some traders have pointed to commodity broker MF Global's (NYSE: MF) additional margin hikes above the CME's as adding to the downward pressure on silver. MF Global earlier declined to comment on the effect of margin hikes on silver prices.
It has long been rumored that JP Morgan (NYSE: JPM) has been holding a massive naked short position on silver and has actively worked to suppress the price of the precious metal.
Though the amount JP Morgan's short contracts is disputed, the CFTC is currently investigating alleged manipulation of the silver market; and though the CTFC did not name specific entities, JP Morgan has been speculated to be at the center of the investigation. Back in December of 2010, CFTC commissioner Bart Chilton stated that “one trader held over 40 percent of the silver market.” JP Morgan inherited its silver positions from Bear Stearns following the government's bailout of the firm.
However, the effect of JP Morgan's silver positions on the recent price decline may be irrelevant, as JP Morgan reduced much of their long position back in December. The firm denied government pressure, stating “it is absolutely incorrect to say or imply that the Nymex, CFTC or any other exchange or regulator has instructed or asked us to reduce our position.”
So, where is the bottom for silver? The upcoming fifth margin hike may signal a continued sell-off. On the other hand, inflation hawks may see this as a buying opportunity. Last week Bernanke continued to re-iterate his belief that increases in commodity prices were “transitory” and stated that the Fed would keep interests rates at record lows for an extended period.
Those who believe inflation concerns have been overhyped should look to play the US dollar. An ETF such as Powershares' Dollar Index Bullish (NYSE: UUP) could be profitable should the dollar rally. Still, while the selloff in silver has been sharp in dollars, it is more pronounced in Euros — the silver price in Euros has fallen 3% as compared to the 2% decline in dollars. Further, despite the significant move in silver this week, the dollar index has remain relatively unchanged trading around 73 all week. source http://www.benzinga.com/commodities/11/05/1060012/how-silver-traders-lost-22-in-five-days-slv-mf-jpm-uup
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