Margin Increases Hit Gold

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!

Sorry, Soybean Bulls, You're Stuck!

The soybean market today closed out at more than 60,000 contracts waiting to be sold. This is an almost certain assurance of another instantaneous lock limit down when trading resumes Sunday evening. The CME is attributing this to the following:

1. Brazil's soybean crop is expected to be higher than earlier estimated.
2. Argentina's soybean crop is expected to be higher than earlier estimated.
3. China has announced that it will release soybean oil in storage for sale into the global marketplace.

If we see a similar scenario played out in the soybean market that we saw a few weeks ago with wheat, possibly lock limits will be expanded, and margins would therefore also have to be increased. If this occurs, panic will spread as traders and large funds seek to liquidate their positions. Brokers will be forced to liquidate trader positions also to raise funds due to margin calls. This, in turn, will accelerate price action downward. Once this is achieved and all the shorts are stabilized, prices will rocket back skyward as new positions are reestablished in soybeans at bargain basement prices. It will be an interesting week for soybean traders next week. I'm glad I liquidate all my positions each day.

Wheat Prices Plunge to Lock Limit DOWN!

Wheat prices plunged overnight to lock limit down, after going lock limit UP 90 cents yesterday, and increasing 70 cents last night. Prices on wheat dropped more than $2.00 in overnight trading, after rising 70 cents in the first few minutes! I've never seen anything like this before in the futures markets!

Historical Precedent Just Two Weeks Ago?

This is very likely a short-term event, and may be a great buying opportunity, if history repeats itself. When the CME increased its lock limits from 30 cents to 60 cents 2 weeks ago, prices plunged because the increase in margins forced brokers to liquidate the long positions of many traders that no longer had account margins that were sufficiently large to cover their positions. This may have occurred again last night, since the CME increased the lock limit from 90 cents (just 30 cents 2 weeks ago) over the weekend to $1.35 -- more than doubling it in just two days! More forced selling has almost certainly occurred. I suspect prices may likely rebound within the next few days -- perhaps even today!