The silver price dropped 10% on Tuesday as the CME raised margin requirements for silver contracts. Peter Hug, global trading director of Kitco Metals, said that the silver squeeze attempt has now “backfired” as bullion inventories have run dry as a result, and with premiums up and few physical products to sell, it is now even more difficult for retail investors to push the price up.
The silver market is taking a hit today down $2 as we speak is the silver squeeze over. That's the question on most people's minds right now, Peter hug global trading director of Kitco metals joins us today. Peter, help us break down. What's going on right now in the markets. Well, it started, uh, obviously it started last Wednesday with the first Reddit posts that, uh, they were trying to mobilize retail investors to try to squeeze the silver market and having managed by Friday close to get the market up, uh, uh, around $2, uh, from, uh, Wednesdays closed.
Um, and then I think they came up with another strategy that if they hit the dealers on the weekend, when the markets were closed, the dealers would be forced to cover on Sunday night and, and move the market higher. And if you recall our conversation from Friday, uh, I suggested, uh, that might work. It might take silver up, uh, you know, to $30, maybe 32.
Uh, we got the 30, um, and, uh, Subsequently, uh, yesterday when the market opened, uh, we gave back, uh, uh, approximately a dollar 50 and this morning we gave back another dollar 50, and we're sitting in the mid 20 sixes, which is, uh, still, uh, about a dollar higher than it was last Wednesday when this first started.
Uh, but, uh, the market has definitely, uh, softened back down. Um, and it, again, as I warned on Friday, uh, it's one thing buying silver at 27, if you're a medium to long-term investor, because I'm still from a macro perspective, bullish silver in 2021, uh, from a trading perspective, uh, you know, much along the lines of game stock.
Uh, you have great if you got in at 20 and sold it at five 50, a not very nice that you got in at five 50 and it's now sitting at 200. Now what the problem is here is what, what this caused by the, uh, by this surge of retail demand, was it literally wiped out small inventories of silver in there, Twain and in the bar market over the weekend.
I mean, literally every dealer that was on the list, uh, sold their entire silver inventory. So. What that has caused as opposed to silver, going to $35 a you just cannot with retail, uh, have the buying power to, to, uh, force the market up beyond fundamentals and the fundamentals don't substantiate. Uh, short-term that type of a move.
Uh, what that did though, was it wiped up the silver inventories? Now? There are no silver inventories, a small investment bars on the market. So people that bought on the weekend were paying premiums anywhere from four to $10 an ounce over silver. Now there's no inventory. So the premiums on, uh, coins and bars are now, uh, similar to what they were in March of last year.
Um, so any type of pullback in this market now, unless investors get involved in the ETF for futures market, there's really no inventory to buy, to be able to add to positions. So, you know, they sort of cut off their nose to spite their face. And the problem with, uh, the futures market is, and this was inevitable as well.
When you get this volatility is this morning, the CME raised margins. So that created a situation for people that were long silver. Um, At the open Sunday night at the w you know, the 29 and a half, the 30 and a half range. Uh, now they saw silver come down, plus margins were increased and now they're forced to liquidate.
So now you've got a cascading event going the other way. Um, and we're, you know, we're almost back to where we were before. Uh, you know, this, uh, this whole story of let's try to squeeze the big players. Peter who's liquidating who's liquidating, Peter. Well people that bought futures contracts pay 29, 50, $30 on Sunday night when the market opened after six o'clock.
Had normal margin requirements or the margin requirements that were in place on Sunday this morning, the CME raised those margins. So you're hit with a double whammy. If you were long silver at 30, first of all, you have a loss because silver is now trading South of 27, but now the margin requirements have gone up.
So when you meet margin, you have to pay double the margin to keep your position alive. And a lot of medium smaller investors that got involved in the futures markets just can't afford to come up with the, with that kind of a margin call. So you have liquidations going into the market and it's causing a cascading effect of the downside.
Yeah. Okay. Um, let's talk about that in just a minute. I want to go back to the inventory side for a, for just a bit. Now on Sunday, I know you were swamped. I tried to get ahold of you. You wouldn't even available for comment because you were just so busy. One of the questions I got from viewers, uh, this is a fair question is, uh, for the dealers instead of, instead of.
You know, filling in orders after the fact or backboarding back backdating orders or perhaps rejecting orders altogether. Why not just raise the premium? Why not just raise the price? They did premiums went way up onsite during, on the weekend. Dealers adjusted their premiums based on their book because their books were going short throughout the whole weekend and premiums were going higher.
Right. Yeah. And it's still sold out. You said even by, I think again, I can't be exact, uh, because all the dealers were different on this, but, uh, you know, sometime early Sunday morning, Um, almost every dealer had posted something on their site that there was a, they were no longer taking silver orders. Uh, I mean our site basically, uh, uh, from the technical perspective was just overwhelmed with the orders.
Uh, and you know, you, you have to get to a point where there there's a cutoff time when you are sort of forced to reject any orders over and above, because you're, you're at a point where you just don't know whether you have the inventory to meet. And the last thing you want to do is make a. A guarantee to a client that you're going to deliver a product and you've oversold the product.
Now inventory deliveries right now, uh, I mean, us mint is anemic on delivering silver Eagles right now. The Canadian mint has been on allocation for the past six months. Um, any, any dealer that's out there selling a silver four to six weeks out, which is what some of them were doing pre last Wednesday. Um, now in my opinion, going to have a significant issue in trying to figure out how to make good on delivering product, uh, with any kind of reasonable time window.
Uh, I mean, we were fortunate. We, we basically just, uh, w we were able to cut it off. There was a, a small issue on our end. Uh, we've allowed clients to come in and make themselves whole again if they want it to, but it, yeah, it was a major problem. Now, we were also fortunate, uh, because I, you know, I could.
Again, you know, I'm not psychic or anything, but I could almost see this coming. And, um, so we do have a relatively good supply, still a hundred ounce silver bars, which we were able to get. First thing Monday morning. And, uh, very incidental supplies of the small stuff like silver Maples, uh, uh, silver Eagles and some, uh, smaller silver product.
Uh, so we do have some 100 ounce silver bars, uh, in stock. You can check all of the other dealer, uh, and these are RCM a hundred down silver bars. Uh, you can check all the other dealers there. None of them have hundred down silver bars in stock. And, uh, uh, so that is still available, uh, from a physical perspective.
But generally the market has been completely wiped out of a small investment grade, silver product. Peter, are you, are you anticipating this demand search to continue? Is this sustainable just on the physical front. Well, I think if, I think if dealers have physical silver inventory, I still think there's a demand component out there.
This was out there prior to the Redick posts. I mean, it was difficult. Uh, you know, if you go back three or four of my posts over the past few weeks, uh, silver inventories were tight. Yeah. Uh, and, uh, you know, as we were getting in Eagles and Maples and hundred ounce bars and 10 ounce bars, they were moving fairly briskly before this happened.
Uh, so I would imagine that that the sort of retail demand on a macro picture, uh, is, is still there. The problem is there's no inventory there. Uh, so now the premiums have gone. I mean, silver maple leaf premiums were at. Uh, memory serves me somewhere around $3 over a spot on a Thursday, Friday last week.
Uh, now they're at $8, a hundred ounce, silver bar premiums were at a dollar 75. Now they're at $5. Um, you know, so basically there's this intent to try to squeeze the market, which. W was it. I, you know, I don't want to use the wrong words here, but it was absolutely, uh, silly, uh, has now backfired. And now there's no retail product in the market and the premiums are pre COVID, uh, or at right at, uh, March levels of last year.
And you don't think the premiums will normalize anytime soon. Within the next two weeks, you can normalize premiums until you've got a solid supply chain. Okay. And right now the supply chain is probably four to eight weeks out. So I mean, how do you set your premiums? Okay. Uh, without knowing where, you know, what kind of volatility we're looking at going forward.
So what the dealers do is they just Jack the premiums up? Uh, they cover their positions in thousand ounce bars. Um, uh, because that's. Those are readily available. And then when the product comes in, we'll swap their thousand ounce buyers for the product because they will still get that product, uh, at, uh, distribution prices.
Uh, and in the interim, they've covered their position. So they're not exposed to the market. Uh, but individual clients looking for a product are going to have to wait. That's to pay through the nose if they find any deal that has inventory. Talk about the futures and regulations. Now, finally, Peter. So going back to the CMS regulation, I'm just going to read the statement.
So they've written margins from $14,000 to 16, 16, 500 per contract effective today, February 1st. I'm sorry, February 2nd. And the statement says the normal review of market volatility to ensure. Adequate collateral coverage. Uh, that was a basis of their decision is a normal for the CME to raise collateral during market volatility.
Oh, absolutely. Yeah. Whether the market goes down or up, they're going to raise margins. Uh, quite frankly, I'm surprised, uh, that the only raised at 2,500, I mean on a 5,000 ounce contract, uh, Uh, if you had gotten in Sunday night and, uh, based on where it is right now, uh, 5,000 ounces, uh, you'd be, uh, uh, almost $20,000.
If you bought the high on Sunday night. Uh, and we've only raised the margin, uh, two and a half thousand dollars. I would not surprise me if, uh, if, uh, the volatility continues that that margin will, the margin will not go higher. Uh, CFTC has also issued a statement last night. It says, I'm just going to read the statement.
The commission is communicating with fellow regulators, the exchanges and stakeholders to address any potential threats to the integrity of the derivatives market. For silver, it says the CFTC has closely monitoring recent activity. Should the regulators be involved? Is there any cause for concern on the regulatory front, Peter.
I don't think they're worried about, uh, uh, about something, uh, I'm towards, uh, from a, from a trading perspective in the futures market. I think what they're worried about is, you know, somebody that's got, uh, you know, it's almost like the Robin hood type of thing. Thing, uh, where clients have got significant positions, the brokers on the futures contract and, and, uh, you know, today there is going to be a significant margin call, uh, with this drop.
And, uh, when this margin call comes, uh, you know, clients are going to have to pony up and if they don't pony up, it's the broker that has the liability. Now they can go after clients individually, but, uh, they have the liability and I would suspect that some of these accounts. Maybe underwater from the perspective of having assets on account to meet this margin call again, just on 5,000 ounces of silver.
If you got in at the top, you'd be at almost $20,000 on that trade. So you can imagine if you multiply that by, uh, increments of 500, a thousand or 5,000 contracts, it's, there's a significant loss in this market. And if the clients don't have collateral, uh, with the broker. Or the broker has access to cash.
Uh, the broker is going to be on the line to meet that margin call with the CME, uh, when they come out this afternoon. So from that perspective, I can understand why the regulators might be concerned. I think it's nothing to panic over yet. Uh, but it is a concern, uh, from a liquidity perspective. Okay.
Final question. Now, Peter, uh, we already seem silver, go down $2 today. Do you have any more anticipations of where it could go? Short-term what's next? I like silver. I mean, I told you guys that a 25 50, I like silver. I liked the macro picture. I think, uh, you know, whether the Biden gets the Republican support or not is going to put through this package and.
Given his green deal package, uh, I mean everything from a macro picture going forward in 2021. And then if you add in the, uh, the possibility that, you know, these vaccines, uh, really get the economy going again, and then inflation starts to pick up second half of this year. I am from a macro perspective, still very constructive the metals, uh, short term.
Uh, well we see at $2,500. Absolutely, uh, possible. Uh, but if you are an investor and you have not engaged in this market, and you want a portion of your assets and precious metals, uh, the mid 20 fives, I still think are a good value for silver and certainly golden in, in, uh, sort of the 1800, 1850 level of certainty, a place where I would add to my position, Peter, thanks so much for coming in with your updates.
Appreciate it. Thanks a lot. Good luck to everyone. Yeah. Thank you. And thank you for watching Kitco news. I'm David Lynn. .