Dan Norcini: Is volatility coming on the open this Sunday evening?

It could be a wild ride for traders carrying leverage next week. The CME could have triggered a massive melt up or meltdown in paper gold and silver, depending on where the market is leaning. However, I believe the likelihood of a meltdown where long positions are forced into liquidation is greater, simply because the shorts are more capitalized and have the backing of the government and the Fed. A printing press can cover any margin requirement.
For Freegolders a meltdown will simply allow the acquisition of physical at even better bargain prices.

CME Group hiking margins across the Board

If I am reading the communique from the exchange correctly, the margin requirements for ALL CME products is being raised by hiking the MAINTENANCE MARGIN requirements to the SAME LEVEL as INITIAL MARGIN requirements, effective as of the opening of trading Sunday evening/Monday morning, November7. The changes were implemented as of the close of trading Friday, November 4th.

If this is correct, and I think I am reading it correctly, this is the first time that I can recall seeing something like this occuring. It will also precipitate some very volatile trading conditions.

I suspect this is tied directly to the fallout from the MF Global debacle. Apparently CME group and its clearinghouse want to make sure there is sufficient liquidity present to cover all its obligations.

This might throw my previous assessment of silver and gold technical action out of the window. Stay tuned as this is going to get even more wild than I previously imagined.

Traders who are not margined up to their teeth and have a sufficient cushion in their accounts, will be okay. Those who are not are going to get hurt on any adverse price action. What I mean by this is simple – if a trader is long and the market sells off, his paper losses or loss of profits will cut into his account balance perhaps bringing the total margin requirements of his active positions below his account balance. He is going to get a margin call that day if not Monday morning or even Sunday evening. Once “called”, the money is going to have to be wired that day or the positions will be liquidated.

Quite frankly, seeing this occuring is very unnerving as I wonder if there is more stress out there from the MF Global debacle than meets the eye. The Clearinghouses obviously want to make certain that they are well capitalized.

My guess is that many of the accounts from MF Global that were transferred and have not gotten the ENTIRETY of their former account balances reinstated, are going to be forced into liquidating unless they have adequate capital on hand elsewhere that is easily accessible and very liquid.


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