CME hikes precious-metal margins again after price swings

CME Group raised margin requirements on precious-metal futures for the second time in the space of a week, following a bout of volatility that saw prices spike then retreat. 

The higher collateral that traders must set aside to hold futures positions in gold, silver, platinum and palladium is the latest evidence of an historic year-end surge in volatility across precious metals markets. Silver in particular has seen huge price swings as it blew through levels that until recently seemed unthinkable. The latest changes will take effect after the close of business on Wednesday. 

Clearinghouses like the CME’s ask brokers to deposit cash, or margin, on a daily basis to cover potential losses on their clients’ positions.

The levels are calculated regularly based on market volatility, according to a description on the CME’s website, and the requirements for silver have risen more than half a dozen times since late September as the metal’s intraday price moves have grown ever-wider. The exchange also increased the margin requirements for copper earlier this week. 

Speculative interest in silver has surged in recent days, both on China’s main spot precious metals exchange and in the US. The metal’s spot price rose to a record above $84 an ounce early Monday, before crashing close to $70, one of silver’s largest intraday price reversals ever.

The contract size of Comex silver futures is 5,000 ounces. Recent price gyrations translated to nearly a $20,000 move for a single futures contract, said Phil Streible, chief market strategist at Blue Line Futures, adding that the size of the moves meant that CME had to raise the margin requirements.

The exchange also has a micro silver futures contract with a smaller size of 1,000 ounces and its trading volume surged 127% in December after remaining lackluster during the January-November period.

Market participants have suggested that the CME’s margin adjustments helped push prices lower this week, by prompting some bullish traders to reduce their positions. A number of analysts had been warning that silver was due for a pullback after the dramatic surge of recent weeks. 

“The price action we had on Monday was inevitable, regardless of whether CME’s margin hikes happened or not,” said Michael Purves, founder of Tallbacken Capital Advisors LLC. Still, he said, higher margins “tend to take some fluff out of the rally.”

Silver retreated sharply on Wednesday, with futures slumping as much as 9.9% toward $70 an ounce. Platinum and palladium contracts also posted heavy intraday losses, while gold retreated more modestly.

(By Yihui Xie, Jack Ryan and Yvonne Yue Li)