Wednesday, August 24, 2011

The effect of margin hikes

The question of whether hikes on margin requirements cause prices to tank can be debated ad nauseum.  Truth is, it's a half-truth.  It reduces the risk profile of the CME, but it also induces panic selling by levered longs.  And because the perma shorts in the precious metals markets are better capitalized, they don't have to close out positions as vociferously.

But a picture is worth a thousand words.  You decide.

Not so coincidentally, it was the hiking of margin requirements by the CFTC which eventually led to the bankruptcy of the Hunter brothers, in their attempt to "corner" the silver market.  That and the CFTC cap on silver ownership.  This forced the liquidation of the Hunts.  The government changed the rules of the game midstream.

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