Let's run two charts here:
[Click all to enlarge]
and
What does this tell us? First, let's remember something about futures markets: For every long there is a short in exactly equal amount. There has to be, since you're not trading a physical thing -- you're trading a future promise to perform. So when you buy a futures contract, someone has to sell it to you. That person becomes short(er) than he was before, and you become long(er) than you were before.
Both sides of that trade have a margin requirement, which is equal on either side of the trade. That is, to be long or short I must post an equal amount of margin. The exchange requires this as a cushion against the possibility of an intraday move that could otherwise bankrupt me before my brokerage can force me to post money against a move that goes the wrong way (from my point of view, of course).
Remember that on a regulated futures exchange, the exchange double-blinds the transaction: I don't know who shorted my long oil contract, or who bought my short future on silver. The exchange not only prevents me from knowing this, it guarantees that the contract can be performed -- that my winnings (if I have them) will be mine, and if I have losses, the person on the other side who I will have to pay will in fact get paid.
For this reason, the exchange doesn't give a damn which way the price moves. It only cares about volatility -- the more volatile, the more dangerous things are for it, since the move might exceed the posted margin before someone is detected as being bankrupt. That can expose the exchange to ruinous loss. As the exchange gets paid a fixed amount per contract to facilitate the trade, it has no interest in allowing that sort of thing to happen -- nor will it.
As a result, when volatility goes up, so do margin requirements. Those who have been trading for any length of time have seen this before. We had major margin increases in the S&P 500 futures in 2008 as just one example.
Margin hikes provide you valuable information about exactly who is holding leverage in their positions. If I buy an S&P 500 contract and have in my account enough cash to clear the entire thing, then despite the fact that the contract is levered, I am carrying no leverage. As such, I don't care about a margin increase since I have enough cash to clear the entire thing in my account. Asking me to post more of it doesn't matter. Ditto for oil or silver.
But if I'm carrying leverage, then I can be forced to close a position that I'd otherwise prefer to keep open. The important point here is that this requirement to close comes upon both shorts and longs equally, since the margin requirement is imposed equally.
Remember what we've been told about silver: The meteoric rise in price was not due to leveraged speculation; rather, it was due to physical demand and capital preservation investment.
Oh really? Then why is it that as soon as margins were increased, it was only the long positions that, on balance, were forced to close out, dropping the price from nearly $50/oz to $33 in a couple of days? Why weren't shorts squeezed out of their positions, which would have forced buying and driven price higher?
That's simple: The leverage was on the long side, on balance. That is, what you have been told for the last two years was a bald lie.
Not only was this leverage on the long side in silver, it was massive enough that it forced liquidation in other commodities, such as oil and gold. The number of people bankrupted by this move was likely very, very large.
Now contrast this with oil. Oil got a margin hike last night. The result was a small (about 2%) move downward which almost immediately retraced. We are now trading back to basically where we were before the margin hike.
What does this tell you? That there is no material imbalance in the speculative leverage position between shorts and longs in the oil contract -- that the price of oil was not driven higher by massive speculative leverage; again, directly contrary to the story you have been told by so-called "mavens" in the market and various political commentators.
People lie or are simply mistaken all the time. The bogeyman is commonly sold to the public as a means of political persuasion. But anyone who trades in these contracts knows how they work, which means that when you have folks in the media running this garbage about leveraged speculation into the maw of a margin change and the price moves in a given direction, exactly what happened and which side of the trade actually held the leverage isn't open to question any more. It's now a fact, and when the media refuses to put people on air who speak to the truth about these matters, they become complicit in the falsehoods that are being promulgated to the public.
In the futures markets in particular, where the rules are well-understood and apply to people equally on both sides of the trade, price never, ever lies about what actually happened.
