Pressure On Commodities?

The Chicago Mercantile Exchange, which is the exchange where various commodities trade has just announced they are raising the margin requirements for trading commodities.  Commodities are bought with borrowed money and now they are requiring more equity to buy those commodities.  This goes into effect today meaning many hedge funds and commodities traders will have to sell commodities immediately to meet their margin requirements which could put a lot of downward pressure on all commodities.  This could be good for the equity markets as commodities have been moving the oppposite direction of the stock market.

This is the type of news that may give the rest of us a golden opportunity.  This could artificially create supply which brings prices down.  Once all the initial selling is exhausted, normal supply & demand comes back in the market but you and I are left with cheaper entry prices.  Oil may be the exception as an Iraqi explosion had oil prices over $107 this morning. 

This news is like requiring you to put more down on your house 5 years into your mortgage.  Let’s say you initially put down 20% to buy your house.  One day you get a phone call saying you need to put down an extra 30% so you have 50% equity in the house.  If you don’t have the money, you have to sell something, probably the house.  That’s what is happening today in the commodities markets.  Had they eliminated $0 down mortgages and made everyone put at least 20% down, you wouldn’t have had the mortgage mess we’re in today.  For the next few years, everyone will be trying to pop any potential bubble in fear of the bubble getting too big and bursting. 

The goal is here is to reduce speculation by weeding out the guys that really shouldn’t be playing this commodities game.  This means pretty much squeezing out the small speculative inexperienced hedge funds. 


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