We’re not talking COT Report or sentiment. We’re talking margin calls and forced liquidations, this week! Here are the details…
Stay with me.
This is important.
The math is easy, and this is potentially huge news.
But first, a little background is critical for those who don’t understand how this works –
Paper silver futures traders have seen steadily decreasing margin requirements since last December, 2017. Click on this link to go to CME Group to download the PDF of historical margin requirements.
Using GoldChartsRUs, we can see that in addition to falling from December, 2017, margin requirements for silver are historically very low right now:
We could get into the various reasons for margin hikes and margin cuts, but suffice for this article to say that the margin requirements and the changes to margin requirements are part of the manipulation. That is to say, by making silver more or less costly to trade, or even making the cost out-of-reach due to margin hikes, changes in margin requirements can force traders to act or be acted upon.
The purpose of this part of the article is to provide a basic understanding of margin to then understand the significance about what I am about to share.
Basically, with lower margin requirements, less up-front money is required to trade paper silver futures contracts. Remember that all-time high in open interest, set just last week? Yeah, the record high open interest is possible, in part, thanks to a steadily declining margin requirement. A steadily declining margin requirement also helps explain how the price has gone sideways to down for most of the year.
Here’s the thing to understand: The notional value, like the face value, of one paper silver futures contract is around $75,000. Each contract is 5,000 ounces of silver, so to calculate the value, it would look like this: Call it a silver price of say, $14.85, multiplied by 5000 ounces and the notional value of the contract is currently more like $74,250. There are other fees and costs associated with trading futures, but that’s not the point here.
Here’s the thing about margin – traders can trade on margin, meaning, they do not have to put up all the money that would be required to carry one contract. In fact, it is less than $4000 that needs to be put up as margin to be able to trade. The low margin requirement allows more retail traders and hedge funds to enter the “market” and trade in paper silver futures contracts because the cost to carry the contract is pretty low.
Currently, the CME Silver minimum margin is $3600 per contract for the September silver contract. On E*Trade, which you will see why it is important in a minute, E*Trade has their initial margin requirement on the September silver contract at $3960:
As a side note, notice the requirement was last updated on E*Trade on of 5/15/2018.
Regardless, the margin requirement is somewhat higher at E*Trade than the minimum requirement at CME Group.
Fast forward to the breaking news, and I’ll ask it as a question: Have the margin calls begun on the paper silver short selling speculators?
We just got a tip-off from one of our contacts that immediately raised our eyebrows. The contact, who trades gold & silver futures contracts, contacted us about what is going on with his E*Trade Brokerage account, and specifically, his short silver contract.
First off, check out the email they sent him (bold added for emphasis):.
Mon Aug 27 05:05:16 2018 Attention Brokerage Customer
Your account currently has position(s) in September Gold, Silver, Copper, Platinum and/ or Palladium Futures. FYI, this product is a physically settled contract. To prevent any possible deliveries. All accounts with positions(s) in September Gold, Silver, Copper, Platinum and/ or Palladium Futures must be flat or short by 3:30 PM CT Thursday August 30th. If your account has long position(s) in September Gold, Silver, Copper, Platinum and/ or Palladium Futures after 3:30 PM CT on Thursday August 30th, long positions will be immediately liquidated and all working orders will be cancelled. If you have any questions, please contact E*TRADE Customer Service at [877-553-8887]
Yes, that phone number works, and yes, I spent some time on the phone with them digging around for info:
Twelve minutes to be exact.
Regardless, not being a E*Trade Brokerage Account holder myself, I could not get many specifics, and certainly no specifics on our contact’s account. I was mainly trying to see if they were raising margin requirements on all their silver futures contract holders, but the nice fella wouldn’t (couldn’t?) tell me. All I could get was some site navigation assistance to see where the margin requirements were listed (the first screenshot in this post).
Back to the email where this sentence is interesting: “To prevent any possible deliveries”. Pretty telling in and of itself, isn’t it? We always call the COMEX a fraud, and how there is basically not much metal being “delivered”, and this email basically proves it.
All they want through the brokerages is paper trading, and there is absolutely zero interest in the exchange of actual physical metal. What a scam and a sham!
Getting back to the email again, the phrases “your account must be flat or short” and “all long positions will be immediately liquidated” also jumped out at me. It’s like they are getting very uneasy about the speculator short position build-up in silver.
Recall, two weeks ago we saw the large specs get net short in silver, and as of last Friday, the large specs had added to their short position:
Yes, there was the net short back in March/April, but the price was also between $16 and $17. Here, the price is down at $15, and the specs are piing on the shorts again! From a much lower price!
Who in their right mind would be shorting silver here, right at the cost of production, with a rising oil price, with an over-extended stock market, a US dollar rally running out of steam, and among other factors, is beyond me, but then again – I don’t trade futures contracts, and I also understand the manipulation in general, and the price suppression specifically.
Back on track.
Also, in the latest COT Report above, notice the continual pairing of the short position held by the commercials. Remember all those calls for the commercials ready to “flip and go long”?
Starting to come into view now, huh?
Here’s where the margin call comes in: The brokerage (E*Trade) told our contact that the margin requirement for his short position was nearly being doubled, from $3960 to $7395!
We are taking this at face value, which requires some trust on our behalf, but suffice to say we have had dialogue with this contact before, and we know the contact, so rest assured the information is credible.
Furthermore, check out this disclaimer on E*Trade’s futures products page, right where the quote for silver and “initial” margin requirements can be found (yellow highlight for emphasis):
Let that second highlighted point sink in for a moment (bold added for emphasis):
If the market moves against your positions or margin levels are increased, you may be called upon by E*TRADE to pay substantial additional funds on short notice to maintain your position.
In other words, this is what we call a “margin call”, which basically means, “pony up because your account needs money, and if you don’t, we will start selling your positions”.
Let’s break that sentence down into two parts.
First, has silver moved off of its lows recently?
Yes it has.
In fact, with a last price of $14.84, silver is now up 3.7% off of its lows of two weeks ago. More specifically, with a 5,000 ounce contract size, the move of $.50 higher adds another $2,500 to the notional value of the contract.
Now, I did not ask where he went short, and no, this is not Marshall Swing I’m talking about.
For now, he will remain an anonymous source.
Secondly, to the point with E*Trade’s policies, has our contact been put on short notice to pony up more cash to maintain the position?
Yes he has, in fact, his margin requirement has nearly doubled. If he does not increase his margin funding by Thursday, the position will be liquidated.
So here are the main questions we are left with:
- What is E*Trade worried about, and do they understand the extremity of the short position held by the large specs in silver, especially at such a low silver price?
- Are other traders getting margin calls and/or being put on short notice to close their positions?
- If others are getting similar notices, are we at the start of the margin calls because of price moving against the shorts?
- Is this be beginning of the most epic short squeeze in silver?
Time will tell if this anecdotal evidence is more systematic in nature, and time may be telling very soon, as soon as this week.
Is the short squeeze starting?
– Half Dollar
About the Author
U.S. Army Iraq War Combat Veteran Paul “Half Dollar” Eberhart has an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill. Paul dived into gold & silver in 2009 as a natural progression from the prepper community. He is self-studied in the field of economics, an active amateur trader, and a Silver Bug at heart.