We have witnessed an interesting phenomenon over the past few weeks. The Dollar, as measured by the DXY, is trending lower and commodities are too. That is a vastly different inter-market relationship that we’ve seen in the past two years.
The media and trend-following strategists (the worst kind) have been busy telling you that commodity prices are up because of demand or because of the expectation of a stronger economy. We all know that is utter bullshit. Some even tell the truth; that prices are up because of the Fed pumping money through QE and ZIRP. Certainly true.
Most commodities are now getting crushed for the first time since the crash. Is the economy weakening? Is the Fed finished pumping? No and no.
The powers that be realized how devastating higher commodity prices are to the economy. But instead of ceasing and desisting from the manipulative unlimited and forever monetary rescue, they decided to manipulate yet another market by raising margin requirements and imposing position limits for commodities.
I’m the first to applaud these new rules–which should have been imposed in the first place. But it just shows that the centrally planned and controlled market continues to be centrally planned and controlled.
The funds that were heavily margined in commodities and have made buckets of money would rather sell than raise the cash for a margin call. Wouldn’t you? Clearly, it is orderly and happening over a period of days and weeks and without panic. And you can be sure that it won’t go on forever. Just until the new margin rules are met.
So, for example, Silver, which went from 20 to 30 from September to January, should give back about half the gain. If widespread margin has still not been met, then the pullback will test the primary breakout near 20. So as a trader, I would begin my position near 25.50 and be ready to buy down to 21. I know it is a wide range, but I am looking to get positioned for an intermediate-term cycle that will rise to test the highs again.
So let the margined sellers trip over themselves and be ready to pick up their pieces. If you don’t then someone else will.
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What about cotton, Scott?
Prices still going up, up up. Is cotton not subject to the same margin restrictions? Is the price of cotton truly being driven by demand?
Cotton was always a bit less speculative than the majors. And there is apparently a cotton shortage.
But like all commodities, parabolic prices eventually reverse sharply…
Scott,
I should probably know this but I’ll admit I’m clueless. Was crude oil subject to the increased margin requirements? I ask because it’s been selling off for the last week and lord knows it’s as speculative as they come (counter to the cotton case).
position limits don’t take effect until next year!
http://www.heatingoil.com/blog/cftc-position-limits-on-oil-speculation-will-not-take-effect-until-2012-agency-announces0118/
CME margin requirement changes:
http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv10-507.pdf