Silver Pullback From Tuesday High May Be Hint Of Correction In More Commodities
10 November 2010, 1:22 p.m.
By Allen Sykora and Daniela Cambone
Of Kitco News
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The sudden long-liquidation sell-off in silver futures late Tuesday, helped along by a Chicago Mercantile Exchange announcement of a hike in silver margin requirements, may be a shot across the bow for commodities as a whole.
Silver prices had run up sharply lately. But so had a whole slew of other commodities, including sugar, cotton and coffee, analysts said. The Continuous Commodity Index peaked at a two-year high of 604.30 Tuesday, a gain of 15% since the start of October. So the commodity arena as a whole may have been ripe for a corrective pullback.
But that doesn't mean the running of the commodity bull is necessarily over, observers said.
December silver traded as high as $29.34 an ounce Tuesday on the Comex division of the New York Mercantile Exchange. But in after-hours trading, the metal suddenly fell back to a low of $26.415.
"That was probably a signal that a much-needed correction overall in commodities is long overdue. You're seeing a lot of that following through today," said Mike Zarembski, commodities analyst with optionsXpress, citing weakness in a range of markets.
As of 12:36 p.m. EST, the Continuous Commodities Index was 7.62 points lower for the day at 594.67.
Silver's slide late Tuesday occurred after CME raised margins, with the "maintenance" margin for speculators rising to $6,500 from $5,000 on a 5,000-ounce contract.
But while this cited as a factor for liquidation, there already were some signs of pressure developing in metals, said Bill O'Neill, one of the principals with LOGIC Advisors. He cited heavy put options selling during the day in gold, indicating some liquidation was beginning to enter the metals arena, perhaps ahead of a Group of 20 meeting.
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"We've had such a huge run-up that you can have these kinds of corrections in less than a moment's notice," O'Neill said. "The margin situation is getting a lot of attention. But I don't think that's why we're necessarily selling off."
He and Bart Melek, global commodities strategist with BMO Capital Markets, both cited the recent gains for the dollar against the euro. A stronger dollar makes commodities in general—from silver to oil to sugar to pork bellies—more expensive for holders of other currencies and thus can hurt demand.
"Yesterday's after-market abrupt correction in silver wasn't only precipitated by the $5,000 to $6,500 move on the margins; you also had the U.S. dollar rallying quite nicely and that has continued today as well, where we have the greenback against the euro doing quite well," Melek said. The single European currency has fallen to a low for the day of $1.3671 from a peak of $1.4282 on Nov. 4.
Other Commodities Also May Be Due For Corrections
While silver's rise has captured much attention, a number of other commodities also rose dramatically in recent weeks but are now showing signs of slipping. This especially will be the case if the greenback should bounce, said Spencer Patton, founder and chief investment officer of the Steel Vine Investments hedge fund.
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"It's more of a correction within a bull market," he said. "The fact is the Federal Reserve has basically said they're going to get inflation no matter what…Asset price inflation has occurred and you've seen commodities respond by going higher. It's still a green light to buy. But it's not that comforting to buy after commodities are up 20% or 30% over such a short period of time."
Cotton futures climbed some 24% so far in November and rose 45% since the start of October, Patton reported. Coffee rose 10% in November and 23% since Oct. 4, he added. While silver it 30-year highs, so has sugar in recent days.
But while he looks for corrections in a number of commodities, Patton said he does not envision widespread hikes in margin calls.
Melek, meanwhile, said he wonders whether there might also be a margin rise in gold at some point. Zarembski said exchanges raise margins in all futures markets periodically, thus more such moves could come if volatility picks up, such as daily price moves of 3% to 5%. However, he said, the size of the silver hike was greater than most. The $1,500 rise in margins for maintenance of speculative positions amounted to 30%.
Ira Epstein, director of the Ira Epstein division of the Linn Group, commented that managing margins when prices go vertical is "an art; I don't think it is a science." As a rule, he said, "I am always in favor of higher margins than lower to protect the customer."
Commodity Pullbacks Could End Up As Buying Opportunities
Patton figures most commodities pullbacks will be viewed as buying opportunities, particularly those such as cotton and coffee that have supply-shortage issues.
Commodities typically fall faster than when they rise, Zarembski said. However, he suspects a pullback in most commodities is simply a correction rather than a trend reversal. "I wouldn't be quite ready to throw in the towel yet on this commodity move," he said.
In fact, analysts often describe temporary pullbacks as healthy so markets don't rise in a parabolic fashion, which often leads to parabolic-type falls, such as the Nasdaq crash a little more than a decade ago.
"Markets need to breathe," O'Neill said. Still, he said, corrections can sometimes be "vicious" when markets rise as rapidly as silver had.
Still, "don't think that if you have a couple of down days, that everything is over," O'Neill said. "The basic tenants that have allowed these markets to go higher are still in place…I don't see this as any kind of trend reversal."
Melek said it should not be a surprise if general commodity strength moderates, particularly since many participants had established short-dollar, long-commodity trades.
"At the end of the day silver is still doing pretty darn well…," he said. In fact, with strong investment and fabrication demand, BMO Capital Markets anticipates a supply/demand deficit next year, Melek said.
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By Allen Sykora asykora@kitco.com and Daniela Cambone dcambone@kitco.com
10 November 2010, 1:22 p.m.
By Allen Sykora and Daniela Cambone
Of Kitco News
http://www.kitco.com/
go to
https://sites.google.com/site/goldandsilver2012/latest-gold-news/rr
The sudden long-liquidation sell-off in silver futures late Tuesday, helped along by a Chicago Mercantile Exchange announcement of a hike in silver margin requirements, may be a shot across the bow for commodities as a whole.
Silver prices had run up sharply lately. But so had a whole slew of other commodities, including sugar, cotton and coffee, analysts said. The Continuous Commodity Index peaked at a two-year high of 604.30 Tuesday, a gain of 15% since the start of October. So the commodity arena as a whole may have been ripe for a corrective pullback.
But that doesn't mean the running of the commodity bull is necessarily over, observers said.
December silver traded as high as $29.34 an ounce Tuesday on the Comex division of the New York Mercantile Exchange. But in after-hours trading, the metal suddenly fell back to a low of $26.415.
"That was probably a signal that a much-needed correction overall in commodities is long overdue. You're seeing a lot of that following through today," said Mike Zarembski, commodities analyst with optionsXpress, citing weakness in a range of markets.
As of 12:36 p.m. EST, the Continuous Commodities Index was 7.62 points lower for the day at 594.67.
Silver's slide late Tuesday occurred after CME raised margins, with the "maintenance" margin for speculators rising to $6,500 from $5,000 on a 5,000-ounce contract.
But while this cited as a factor for liquidation, there already were some signs of pressure developing in metals, said Bill O'Neill, one of the principals with LOGIC Advisors. He cited heavy put options selling during the day in gold, indicating some liquidation was beginning to enter the metals arena, perhaps ahead of a Group of 20 meeting.
go to
https://sites.google.com/site/goldandsilver2012/latest-gold-news/rr
"We've had such a huge run-up that you can have these kinds of corrections in less than a moment's notice," O'Neill said. "The margin situation is getting a lot of attention. But I don't think that's why we're necessarily selling off."
He and Bart Melek, global commodities strategist with BMO Capital Markets, both cited the recent gains for the dollar against the euro. A stronger dollar makes commodities in general—from silver to oil to sugar to pork bellies—more expensive for holders of other currencies and thus can hurt demand.
"Yesterday's after-market abrupt correction in silver wasn't only precipitated by the $5,000 to $6,500 move on the margins; you also had the U.S. dollar rallying quite nicely and that has continued today as well, where we have the greenback against the euro doing quite well," Melek said. The single European currency has fallen to a low for the day of $1.3671 from a peak of $1.4282 on Nov. 4.
Other Commodities Also May Be Due For Corrections
While silver's rise has captured much attention, a number of other commodities also rose dramatically in recent weeks but are now showing signs of slipping. This especially will be the case if the greenback should bounce, said Spencer Patton, founder and chief investment officer of the Steel Vine Investments hedge fund.
go to
https://sites.google.com/site/goldandsilver2012/latest-gold-news/rr
"It's more of a correction within a bull market," he said. "The fact is the Federal Reserve has basically said they're going to get inflation no matter what…Asset price inflation has occurred and you've seen commodities respond by going higher. It's still a green light to buy. But it's not that comforting to buy after commodities are up 20% or 30% over such a short period of time."
Cotton futures climbed some 24% so far in November and rose 45% since the start of October, Patton reported. Coffee rose 10% in November and 23% since Oct. 4, he added. While silver it 30-year highs, so has sugar in recent days.
But while he looks for corrections in a number of commodities, Patton said he does not envision widespread hikes in margin calls.
Melek, meanwhile, said he wonders whether there might also be a margin rise in gold at some point. Zarembski said exchanges raise margins in all futures markets periodically, thus more such moves could come if volatility picks up, such as daily price moves of 3% to 5%. However, he said, the size of the silver hike was greater than most. The $1,500 rise in margins for maintenance of speculative positions amounted to 30%.
Ira Epstein, director of the Ira Epstein division of the Linn Group, commented that managing margins when prices go vertical is "an art; I don't think it is a science." As a rule, he said, "I am always in favor of higher margins than lower to protect the customer."
Commodity Pullbacks Could End Up As Buying Opportunities
Patton figures most commodities pullbacks will be viewed as buying opportunities, particularly those such as cotton and coffee that have supply-shortage issues.
Commodities typically fall faster than when they rise, Zarembski said. However, he suspects a pullback in most commodities is simply a correction rather than a trend reversal. "I wouldn't be quite ready to throw in the towel yet on this commodity move," he said.
In fact, analysts often describe temporary pullbacks as healthy so markets don't rise in a parabolic fashion, which often leads to parabolic-type falls, such as the Nasdaq crash a little more than a decade ago.
"Markets need to breathe," O'Neill said. Still, he said, corrections can sometimes be "vicious" when markets rise as rapidly as silver had.
Still, "don't think that if you have a couple of down days, that everything is over," O'Neill said. "The basic tenants that have allowed these markets to go higher are still in place…I don't see this as any kind of trend reversal."
Melek said it should not be a surprise if general commodity strength moderates, particularly since many participants had established short-dollar, long-commodity trades.
"At the end of the day silver is still doing pretty darn well…," he said. In fact, with strong investment and fabrication demand, BMO Capital Markets anticipates a supply/demand deficit next year, Melek said.
go to
https://sites.google.com/site/goldandsilver2012/latest-gold-news/rr
By Allen Sykora asykora@kitco.com and Daniela Cambone dcambone@kitco.com
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