Silver Prices Tumble 12% After CME Hikes Margin

Two weeks of gains in the silver market were erased in 11 minutes as investors sought to avoid higher trading costs and cash out of a historic rally.

Silver prices tumbled 12% shortly after electronic trading opened in Asia for the week -- around 6 p.m. EDT on Sunday -- in a swift and violent cascade. Prices recouped some of the losses over the course of the trading session, but the most-active July silver futures contract closed down 5.2% at $46.084 a troy ounce on the Comex division of the New York Mercantile Exchange. After prices had settled for the day, silver futures staged another sharp drop in electronic trading.

Traders said the declines were triggered after Nymex raised its trading-deposit requirements, known as margins, over the weekend. To trade silver futures, investors typically pay only the margins, which cost a fraction of a contract's full value of around $230,000.

CME Group Inc. (CME), which operates the Nymex, had raised its margin requirement for speculative traders twice last week due to high volatility. These investors must now put up $14,513 per contract for a day trade, and a further $10,750 to keep that contract overnight. Both requirements are up 24% from a week ago. For investors holding hundreds of contracts, that's a difference of hundreds of thousands of dollars.

Silver is much less costly than gold, but gold's margin requirements are less than half of silver's. The higher margins are a deterrent to new investors looking to enter the market.

"That's going to scare the weaker hands out of the market immediately," said Ralph Preston, market analyst at Heritage West Financial.

Silver prices have nearly doubled in six months, and both silver and gold have zoomed to record levels on concerns about low U.S. interest rates, inflation and investor demand for an affordable store of value. Both metals are considered to be a safe haven when bearish sentiment pressures equities and the dollar. But the two markets don't always trade in concert.

Gold is very scarce and has few industrial uses. By contrast, silver is more abundant, and the metal's use in high-end electronics and manufacturing makes it sensitive to economic downturns.

However, "for the same money you could trade almost twice as many gold contracts," said George Gero, vice president with RBC Capital Markets.

Several market participants said silver's decline was accelerated by broker MF Global (MF), which they said raised its own margin requirements on top of CME's increase.

An MF Global spokeswoman declined to comment on whether the company had raised its margins.

Low trading volumes likely amplified silver's decline. It took less than 6,000 contracts changing hands, or around 3% of the day's trading volume, to knock prices to a two-week low on a day when many markets in Asia and Europe were closed. Gold has been less prone to such wild price swings as there are many more market participants trading gold futures, which reduces the influence of each individual transaction.

"This was panic-type selling. As the market started falling in the midst of thin volumes it drew more sellers to the market, and this created a vacuumed to the downside," said Dave Meger, director of metals trading at Vision Financial Markets.

Front-month May silver futures settled down 5.2% at $46.078 a troy ounce.

-By Tatyana Shumsky, Dow Jones Newswires; 212-416-3095; tatyana.shumsky@dowjones.com

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