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Changing Margin Requirements



March 30, 2008 – Comments (12)

The Collection Agency has a good piece on moral hazard

At the end of the piece it mentions the changing margin requirements imposed by the exchanges.  I haven't seen anything on how those margin requirements are changing, but I did a quick search and I found a piece on margin requirements and how they would affect commodities

This is a good change.  I know buying commodity futures was highly leveraged.  I remember reading on a board somewhere where they guy managed to triple his money by buying a future contract on leverage and the commodity price went up.  Well, if someone can triple their money with a 10-20% swing in price, they can also lose it with half the swing.  Increasing the margin requirements will cause less speculation and less price increases due to speculation.  But it is going to hurt those that are leveraged to the hilt on these things already.

Consider it a bit more of the great leverage unwind, and duck.


12 Comments – Post Your Own

#1) On March 30, 2008 at 1:38 PM, allstar31 (99.90) wrote:

I agree that Margin requirements for everyone, including large banks, should be tighter..


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#2) On March 30, 2008 at 1:48 PM, abitare (30.15) wrote:

Deleveraging is the biggest issue in the market today IMO. Commodities are the last Greenspan bubble standing, will deleveraging take them out, yes. Unless the war in Iraq, expands to Iran. Then Greenspan's commodity bubble will inflate to parabolic regions.

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#3) On March 30, 2008 at 2:13 PM, Tastylunch (28.69) wrote:

agreed, deleveraging may be very painful in the near term but it's a necessity to preserve our system.

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#4) On March 30, 2008 at 2:18 PM, dwot (29.15) wrote:

This summarizes it all...

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#5) On March 30, 2008 at 3:37 PM, dwot (29.15) wrote:

The borrowing is ending...

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#6) On March 30, 2008 at 4:06 PM, DemonDoug (31.22) wrote:

dwot, and abit, I disagree with that assertion.  Gold and silver (and to a certain extent oil) are acting much more like currency than commodities.  I do not agree with gavekal when they said in that last link "Commodity markets have been dominated by investors and financial speculators, rather than real physical demand and supply. This has caused commodity markets to price the underlying goods at levels which far exceed any fundamental justification."

How can this be, when there are tons of sellers out there that have no bullion or coins to sell, or are taking minimum orders of 5k or more?  Especially when you look at the money supply numbers, all that money has to go somewhere.  I think, like any investment, leverage can add to the price of the asset, but as these assets unwind, you are going to see only temporary drops in precious metals as hedge funds unwind their PM derivatives and physical assets, but after that the fundamentals of having an inflating currency with no where to put in a stagflationary environment means the PM's get huge appreciation.  This shouldn't be a shocker, it happened in the late 1970s, and the inflation adjusted high for gold is somewhere around 2600, which is where I believe the absolute top will be (I tend to agree with itulip's scenarios, and the gold prediction is 2500 for a top).

The only way commodities goes down is if Congress revokes the Fed's charter and restarts the central bank with Paul Volcker or someone like him.  There is no way commodities will go down, at least priced in US dollars, with interest rates as artificially low as they are.

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#7) On March 30, 2008 at 4:16 PM, DemonDoug (31.22) wrote:

dwot, your link in #5 is also a highly inflationary signal. When the supply of US dollars goes up, and the demand goes down, that means each dollar is worth less.  The US dollar is losing it's status as the world's sole reserve currency.  The theory it will be replaced by a basket of currencies.  Also highly inflationary as foreign goverments SELL their dollars, increasing supply even more.

Currently the US dollar index is at 71.  It's going lower, many believe into the low 50's.  And what wins in that scenario?  Gold, silver, copper, oil, wheat etc etc.

And hence my bullishness on all things oil, btw.

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#8) On March 30, 2008 at 5:52 PM, dwot (29.15) wrote:

Doug, certainly that demand for bullion is there.  A friend mentioned someone who was trying to buy some and there simply wasn`t any supply to buy for several days.  But that could also be related to the volatility of price and making sure you don`t carry too much.

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#9) On March 30, 2008 at 8:27 PM, FourthAxis (< 20) wrote:

Oh, you noticed the requirement change too huh?  ;)

Let the great unwind begin!

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#10) On March 30, 2008 at 8:40 PM, dwot (29.15) wrote:

FourthAxis, it was actually a few days after the fact I noticed, by reading someone mentioning it on a blog somewhere.  To me, that was important enough to search out and read the original new.

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#11) On March 31, 2008 at 12:53 AM, DemonDoug (31.22) wrote:

dwot, in that type of environment, when hedgies unwind and dump gold, that is the time to buy.  There is a lot of leg left in the commodities bull.

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#12) On March 31, 2008 at 9:23 AM, dwot (29.15) wrote:

Yes Doug, I suspect commodities will have a hit. 

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