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A Silver Lining to last week’s selloff?

By Chris Johnson, Contributor
NEW YORK (SmartStops) — Despite increasing margin rates in silver futures contracts four times over the past couple months, Kim Tyler, president of CME Clearing, said the margin increases were not responsible for the slide.

Silver dropped nearly 30% last week, more than any other commodity, and traders are blaming the margin hikes, as the CME kept raising the margin requirements on the precious metal.

Tyler went on to say:

“The market is well tuned so that if there’s a market move that approaches or exceeds our volatility limits. We try to make changes in a way that we can telegraph to the market, so that participants have notice. We try to be routine and predictable and provide no surprises. When market conditions become more volatile we would increase margins in anticipation of that, and when volatility decreases we don’t want to create unnecessary capital costs. We try to be proactive with either something we can measure or something we can judge to likely effect our markets.”

Silver was up over 5% today, as it gained back some of last week’s losses. While it will not be known for a while whether last week was just a blip in the road or the start of something more, there are silver ETFs to consider trading, should last week prove to be a “buy the dip” scenario. iShares Silver Trust (SLV) and ProShares Ultra Silver ETF (AGQ) should do well.

Trend Analysis: Both SLV and AGQ have been in uptrends since the second round of quantitative easing went into effect in November, but really started to turbo charge once the calendar turned to 2011. On May 4, shares of SLV and AGQ both broke the 50 day moving average, but are well above the 200 day moving average.

Risk Analysis: If you like silver at these levels, be sure to first determine your risk and effective exit strategy. As shows, for SLV, potential problems could arise if it should break the current price point of $33.68, and AGQ crosses below $171.36.   When buying in, be sure to have the right amount of quantity based on your risk.   A free position sizing calculator is available at SmartStops.


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