Over the past few weeks, the CME has hiked the margin requirements on silver and other metals. But silver was obviously in the cross-hairs of those that were worried that speculation was reaching fever pitch and worried about any pricing draw downs as margin limits were bulging already. Any drop would exacerbate the problem as the excessive leverage used to buy positions would crumble at the first sign of any price pressure.
Even though the buy-the-dip mentality has permeated all aspects of investing (side note: remember when this was last a big strategy?), right now there is a great deal of risk within the commodity space. In particular, the potential for additional margin and maintenance requirements will surely be part of the strategy to keep the speculation within the oil and other commodity markets in check.
Think of what we have been hearing lately from the “powers” on the Hill. President Obama had now decided that it is the speculators that are the ones responsible for driving up the price at the gas pump. He vowed to get the speculators out of the market or at least lessen their impact on the energy markets. Naturally this is a position that will gain favor with voters, but it also somewhat opposes his green energy initiative.
Then there is Fed Chief Bernanke. He has told us in plain English that inflation is transitory. Transitory…. Does that mean that he believes the Core CPI will be benign from here on out or that the headline CPI will level off? How much of this is under his control? Of course the answer to that question is rather simple. He controls the water supply that feeds the lawn. That is how we get green sprouts that eventually grows into a beautiful lawn – with a few weedy areas of course.
Next, Treasury Secretary Timothy Geithner has recently stated that the U.S has a strong dollar policy and that we would never do anything in action to competitively devalue it against other currencies. Now, if that were true, the U.S. would be one of the only countries that is not involved in some form of currency manipulation. Somehow, I do not think that is the case.
Finally, there is an endless loop that will need to be broken in order for the U.S. economy to breakout into the next leg of its expansion. Even as Fed stimulus measures are supposed to be withdrawn (in part) in July, the after effects of such a massive amount of money to hit the system is not going to stop on a dime. Add that to the increase in the world’s energy usage estimates and there could be a significant move higher for energy related commodities. That will collide directly with any chance of a consumer leg economic growth plan.
So, in the end, between the economy and political pressures, it would not be a surprise to see additional pressure put on any sizable move higher for Oil, Gas and other commodities.
The Commitment of Traders report shows that there is still a great deal of long interest in both silver and crude.
Bloomberg has also had some recent observations today about the short position in the U.S. Dollar that could provide some additional pressure to commodities, if (when) the trade reverses.
Positioning data also suggests that the short U.S. dollar trade had become extreme versus the euro, the Australian dollar and the New Zealand dollar. The net short U.S. dollar position, as of last Tuesday, was most extreme versus the euro, based on the absolute size of the position (96,219 contracts) and the number of standard deviations (1.9) from its one-year average. It was most extreme versus the Australian dollar based on the ratio of net longs to open interest (0.48) and the New Zealand dollar (0.4).