Raising the Margin Requirements

Well… There sure are a bunch of different opinions about what the effects of Bin Laden’s death will be… Yesterday, it sure seemed as though it was a good thing to happen to the dollar, right about the time the dollar was about to head to doomsville…especially against gold and silver… I guess all those people selling their metals yesterday thought that by killing our #1 enemy the geopolitical problems of the world just went away… I’m afraid and sorry to say that the geopolitical problems of the world are not going away; and if anything, I would think that they are now heightened… We could see a spark of retaliation… I mean, didn’t we get very upset when we saw “them” dancing in the streets after 9/11?

OK… So… Silver really got sent to the woodshed yesterday after having to go out, find its own switch, and then get whipped with it! (Used to happen to me on the farm!) You see, silver saw its margin requirement raised, which was really a blow to the metal. The commodities exchange announced yesterday that they were raising the minimum amount of cash that must be deposited when borrowing from brokers to trade futures, from $14,513 to $16,200…

I’m not saying this just to fill space here, folks… But the folks at the commodities exchange sure put the “speculative element” to bed for silver, eh? Now… When I came in this morning, the silver price had gained back $1.50 of the $5 it lost yesterday… But as I write, the recovery in silver is fading fast…

You know… Many years ago, I banged on Fed Chairman Big Al Greenspan for not raising the margin requirements on equities, especially after his “irrational exuberance” statement… But, that’s water under the bridge…

So… This morning we’re looking at one of those “risk off” days, with the dollar, yen (JPY), and Swiss franc (CHF) all in rally mode. US Treasury yields are heading back down again, or have headed back down I should say… Which makes no sense to me… The Fed’s buying program is winding down, which underpinned yields, and kept them from rising too much, but with that going away, one would think that with the main buyer gone from the markets, that Treasuries would be getting weaker, and weaker… But NOOOOOOOOO! Instead they are getting stronger and stronger… Where are the bond vigilantes? And, isn’t the US still trying to figure out their debt ceiling? I thought so!

So… A dollar rally going on this morning… With very little in the way of data in the cupboard for us to chew on… We will see the color of factory orders, but that’s it…

I see where US Treasury Secretary Geithner extended the debt-ceiling deadline to August 2nd. Apparently, Treasury Secretary Geithner paid his taxes this year, because he mentioned that tax receipts were better than expected! HA! So the deficit spending flag wavers are now dancing in the streets, because this just means that now the US can continue to deficit spend even longer without facing the music! I shake my head in disgust…

Well… There was good news in the world that wasn’t tied to OBL… And it came from Brazil… Yes, the country that has done nearly everything they possibly could to stem the appreciation of the real (BRL), saw a very strong trade surplus, which leads me to ask the question, “Why penalize the currency when the strength of the currency isn’t hurting exports?” Brazil’s trade surplus reached $5.03 billion in the first four months of this year, a 132% increase from the comparable period last year, the government announced. This year, exports from Brazil totaled $71.4 billion, while imports were worth $66.67 billion.

Remember last week, when I explained the interest rates on non-deliverable currencies, like China, Brazil and India? I told you that speculators drive the interest payments that could be paid, down, by making it so expensive to buy the currency forward? Well… That’s what we’re seeing in Brazil right now… Everyone wants a piece of Brazil these days…and that might not be a good thing… But as long as you’ve listened to these warnings about only using the speculative portion of your investment portfolio to buy reals, you’ll ride the waves…

Chris Gaffney gave me his Economist from last week to read on the plane ride home on Sunday, and I found a piece in the magazine on Greece and their debt situation… I was reading it, and thinking to myself… This is the same stuff I wrote about a couple of weeks ago! You don’t think? Nah… Just a co-inky-dink… But, to repeat… Here’s my thought from the April 19th Pfennig

When is Europe going to restructure the Greek debt once and for all? Rather than have these problems continue to come back and bite them in the rear every time it looks like the Eurozone is ready to move forward… Again, I’m feeling quite regal this morning, and once again, if Chuck were king… Look, most of the Greek debt is either held by the ECB or Greek Banks… So take the hit on a maturity extension and get it over with! Greece has this maturity schedule: 2011: 39.7 billion, 2012: 45.2 billion, 2013: 40.6 billion…

Yes… That was me! And now The Economist agrees… Extend the maturity on the debt, forego some payments of interest and be done with it! And then maybe, just maybe, we could go six months without hearing about Greek debt!

I’m reading my friend John Mauldin’s new book, Endgame, and he sure spends a lot of time talking about and referring back to Greece and their debt… I’m only part way through the book, but so far, I like it…

The Reserve Bank of Australia (RBA) left rates unchanged last night (no surprise here), but maintained a clear tightening bias… I think the thing that stung the Aussie dollar (AUD) – bringing it back to $1.08 after hitting an all-time high of $1.1012 yesterday – was the statement by the RBA after the rate announcement that… “The Australian dollar strength was exerting additional restraint on the trading sector”… I would have to say I agree with them… It’s not like I didn’t enjoy seeing the Aussie dollar rise to $1.10, it just didn’t look right to me… And like the RBA said, the level was adding additional restraint… There’s a time and place for A$1.10, but I don’t think we’re there yet… So, I think seeing profit taking is healthy…

Then there was this… You know… The number one question I’m asked all the time, is “Do I think that the government will confiscate everyone’s gold like they did in the ‘30s?” And I always have the same answer… While I wouldn’t put it past this government to attempt to do it… I doubt they would… You see, in the ‘30s gold was a part of our money, tied to the dollar… If the US wanted to increase their debt spending, they had to have the gold to back it, so they took/stole/confiscated everyone’s gold. But gold isn’t a part of our money any longer, and so, why would the government need to take everyone’s gold again? Besides, there are too many of us that now own gold, and the pitchforks and rakes would be raised!

Well… I see where the great mind, Richard Russell, had something to say about this question of whether the government would take people’s gold again…

I’ve thought about this at length, and I’ve arrived at what I believe to be the correct answer. The answer is – No, the government will definitely not call in the gold. The simple reason is that a tremendous amount of gold is held in very powerful hands. Gold (GLD) and gold bullion is held by pension funds, university endowment funds, large powerful hedge funds, corporate reserves, and state treasuries.

In other words, my thesis is that gold is now in such powerful hands (much of it even political) that there’s no way that the US government would call in gold. Furthermore, what purpose would it serve if the US did call in the gold? In 1933 Roosevelt called in privately-held gold and then raised the price of gold from $20.22 to $35 an ounce, this in an effort to reinflate the depression-laden economy.

Thanks to Richard Russell…one of my fave writers!

To recap… Experts are debating the Bin Laden effect with varying opinions… But, in Chuck’s eyes, the geopolitical problems of the world continue to ramp up, with the fear of retaliation. It’s a risk off day, with dollars, Treasuries, yen, and francs all rallying… Silver saw a huge loss yesterday after the CME raised the margin requirement for the metal. Brazil’s trade surplus widened, which makes one wonder why the Brazilian government has spent so much on trying to keep the real from getting strong!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning