May 1, 2011

A Sunday Vertical Drop of Gold, Silver, Platinum and Palladium

By EconMatters

I was fully expecting a non-eventful Sunday afternoon when out of no where, precious metals started their contest of vertical drop, as shown in the following live charts from Kitco.com as of Sunday, May 1, around 7:00 pm EST. 

As expected, silver is the undisputed champion, dropping about 10% from the previous day's close, glod, platinum each went down about 7.5%, while palladium lost about 2% (percentage based on spot prices on charts below).





For now, there does not seem to be any significant event that could prompt such a move in precious metals (Bin Laden's death is not considered a significant event for the silver market to plunge double-digit).  So, my best guess is that this Sunday sell-off is most likely related to the recent margin hikes by CME and MF Global that finally took their toll on the Silver market, forcing some big players to liquidate positions triggering a cascading stops to be executed.

According to Inside Futures, MF Global implemented a 175% margin increase over the CME's recent 9% margin hike.  Moreover, Bloomberg reported on the evening of Sunday, May 1 that the CME imposed another incrase of the initial margin by 13% to $14,513 per contract from $12,825, to take effect after the Friday close.  Margins were $4,250 a year ago.

Such a huge margin increase typically will trigger a mass liquidation and reduce traders' participation in the silver market, which would also trigger sell offs in other commodities.  Crude oil and copper were both traded modestly lower, partly responding to the movement in precious metals.

Meanwhile, amid silver's recent huge runup, some investors are moving ot take profits, while U.S. Commodity Futures Trading Commission data showed hedge-funds and other large speculators cut their net-long positions in New York silver futures by 26% in the week ended April 26, based on Bloomberg's account.  

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