We have seen some serious volatility in the precious metals markets over the past week. It is no secret that we employ them as an anchor for our portfolio strategies. The sharp sell-off in the silver market is a result of the CME (Chicago Mercantile Exchange) raising the margin requirements to buy silver futures contracts. In short, this means that the buyer has to put more cash into the deal so to speak. The CME has raised the margin requirements four times in the past week! The buyers did not have the cash to give CME to hold their contracts and were forced to sell those contracts (most at a loss) to cover their margin calls. This pushed the price of silver down. We believe this is an effort to take the attention off the supply shortage in the marketplace for silver. We have known for some time that there were many more contracts for silver than there was physical metal for delivery. If all the futures contract holders were to ever demand delivery rather than sell or roll their contracts, the result would be a tremendous spike in the price of silver because there would not be enough of the physical metal to deliver.

We have opined for some time our belief that we do not operate in efficient markets. The actions of the CME would seem to make our case. Any time a group can change the rules, the market is not efficient by definition.

Morning Application

What does all this mean for us and our clients when the alarm goes off in the morning? Several days ago we decreased our silver holdings. We had substantial gains in almost all of our accounts. Some were in excess of 100% for their silver position (remember we started accumulating silver at $17/oz). We had allowed the position to overweight itself with its own growth and were comfortable with that position until the market turned against us. We remain bullish on silver in the intermediate and long term but have simply re-balanced to our strategic percentage position.

Outlook

We anticipate a bumpy summer in all markets. With a persistent unemployment problem, sovereign debt crises, slowing earnings, geopolitical tensions and a weakening dollar it will be interesting.

One of the main reasons we are still bullish on precious metals is the upcoming raise in the US debt ceiling. The result will be additional dollars printed to pay for new debt we, the US, will have to take on in order to not default on our obligations as a country. This action will force the dollar to decline further and increase the value of precious metals.

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