Deleveraging Hits the Commodities Markets

There will be more mayhem to come this morning when the grain markets reopen. CNBC has just reported that the Chicago Mercatile Exchange has just announced that they will significantly increase margin requirements this morning at the open of the markets. In some cases they will increase margin by as much as 50%(for corn) and 30% for soybeans. This is obviously the effect of the credit squeeze coming into the futures markets.

The price of gold has dropped precipitously on the news (but is now finding support and starting to rebound -- I'll probably buy), and so has oil. I expect the grains to be affected as well, but the grains markets are closed until 10:30 EST. This is likely to force many (not me, fortunately) to liquidate some of their positions in the commodities markets, driving commodity prices downward.

This has happened before. Just about two months ago, wheat margins suddenly increased, causing many traders to liquidate their positions and causing wheat prices to plunge. However, the effect was only temporary, since once these positions were unwound, wheat prices surged higher once again. I will seek to take advantage of this change both on the drop and again on the rebound, if events are similar this time. I suppose this provides an advantage to traders like me who don't overleverage their trading accounts. It will be another wild ride today, I suspect.

I can't help but wonder if this is possibly another machination to try to force commodity prices lower in an artificial manner. If so, it will only work temporarily, but the effect is likely to be significant on a short-term basis. We will know that there is some nefarious agenda behind it if margins on only food commodities are affected. It stock market index futures are unaffected, then we will know that this is part of a plan to artificially force food prices -- and thus, inflation -- down. One must certainly consider it questionable that with the extreme volatility in the stock markets over the past few months, margins on the stock index futures have not been raised significantly! This is no coincidence! If we see margins increased on treasuries also, this will be further evidence that manipulations of the financial markets are occurring in order to force money out of "safe" places (like treasuries, food commodities) and back into the stock market. Interestingly, the price of gold, after plunging initially, is rebounding vigorously.

It also teaches traders that they shouldn't use leverage excessively, because it could force them to liquidate positions and lose money. Stay out of debt, folks! Keep you margin at a healthy level, without excessive leverage! Especially during these uncertain times!