Defensive notes on the margin
The CME has imposed large margin hikes on precious metals contracts in recent weeks, in particular silver. Is this a blatant attempt at price suppression? Or just business as usual?
Notwithstanding the spectacular outperformance of precious metals in 2025 I do not believe they are fundamentally overvalued. A large price adjustment higher is entirely justified when taking into account the exponential growth rates of money and credit in recent years and the ongoing deterioration of government finances.
Then there is the issue of dollar weaponisation. The US has been imposing sanctions on Iran, North Korea and a few other so-called “rogue countries” for decades. In 2014, following its annexation of Crimea, the US also placed sanctions on Russia.
Russia responded by divesting out of US Treasuries and other dollar securities and increased its rate of gold accumulation.
While other countries took note, they didn’t necessarily follow Russia’s lead. Until, that is, the US threatened to impose sanctions on any country that did not sanction Russia following its invasion of Ukraine in 2022.
That set off a scramble out of dollars and into gold. The global share of central bank reserves in gold now exceeds that of dollars.
Yet while gold and other precious metals prices thus have good, fundamental reasons to be significantly higher today than in years past, that does not mean there is not a degree of speculation going on around the margins.
All financial and commodities markets are characterised by varying degrees of speculation. There isn’t a single market in anything, anywhere, driven by fundamental factors alone. Indeed, in a world of incomplete and constantly flowing new information, traders can’t even agree on what the fundamentals are, much less separate fundamental from speculative activity in real time.
Speculation is in the eye of the beholder
Some argue that commodities are particularly prone to excessive speculation, wildly overshooting whatever the “fundamentals” are claimed to be from time to time.
But fundamentals and speculation are ultimately in the eye of the beholder. For example, in recent years I have consistently argued that the US stock market, in particular “big tech”, is fundamentally overvalued and that speculative activity is behind soaring valuations.
But overvalued versus what exactly? Versus the dollar, which represents a claim on an ever-diluted portion of an expanding money supply? Versus Treasury bonds, which are growing exponentially in supply as the US government continues to run massive, chronic deficits? Versus other forms of credit, some of which are riskier than the stock market? Versus precious metals, which in 2025 outperformed strongly?
The challenge in claiming that something is fundamentally over- or undervalued is that it must be demonstrated to be over- or undervalued versus something else. Traditionally, this has been a base currency, such as the US dollar. But if the dollar is being devalued, we need to find an alternative.
This is where commodities can play a role. They cannot be printed, devalued or defaulted on by governments. As such, in a world of fiat currency instability, commodities can provide a superior benchmark for comparing relative asset values.
I can’t help but chuckle when some equity or bond analyst argues that commodities are inherently “speculative” in that they don’t represent claims on future cash flows and, as such, cannot be properly valued. Perhaps that is true in nominal terms. But in real terms, commodities can be compared to currencies and financial assets, which naturally carry some combination of devaluation and default risk. As those risks necessarily grow as monetary and fiscal policies become more unsustainable, so does the relative attractiveness of commodities as a hedge.
That said, of course there is speculation taking place in the commodities markets. But please, show me a market in which there is no speculation! For an investor concerned about chronic fiat currency debasement and government deficits, is it really a speculative act to reduce exposure to currency and financial market risk by holding precious metals or other commodities instead? Hardly.
Speculators versus commercial traders
Regardless, investors should always be wary of markets in which speculation appears excessive. Within commodities markets, there are various ways to try and estimate the degree of speculation taking place.
One popular way is to compare the positions of commercial vs non-commercial trading accounts on the major commodities exchanges. Commercial accounts are those that trade on behalf of an entity which has a natural exposure to the underlying, deliverable commodity by virtue of its business.
Think of a farmer, for example, who might systematically sell various agricultural futures on an ongoing basis to lock in a sale price in advance, thereby holding profit margins more stable over time; or a mine owner selling various metals futures for the same reason. On the other side, think of the miller or the meatpacker seeking to lock-in purchase prices for their grain and livestock, respectively; or an automobile or appliances manufacturer requiring substantial metal inputs, etc. Futures contracts enable both producers and consumers of a given commodity to manage the price risk inherent in their businesses.
Speculators, however, are those who have no commercial need to either purchase or sell a given commodity. Rather, they are seeking to profit from price fluctuations, be they up or down.
Speculators may have a bad name but, in fact, they perform an essential function, which is providing liquidity for the commercial buyers and sellers. In much the same way that a bank matches depositors (or lenders) with borrowers, thereby providing a liquid market in money, so speculators can be understood to help match buyers and sellers of various commodities. Sometimes the speculators make money; sometimes they lose. But regardless, they create a larger, more liquid market for all.
While this distinction between commercials and non-commercials is nice in theory, in practice it is actually quite difficult to make. One reason for this is that commercials can speculate. A farmer might believe, for whatever reason, that grain prices are likely to rise over the coming year and, as such, rather than lock in a sales price for his crop at today’s futures prices, he can leave his production unhedged, holding out for a higher sales price come harvest time.
A similar decision could be made by the miller who, believing for whatever reason that grain prices are going to fall, leaves his grain input costs unhedged. Producers and consumers of all manner of commodities have tremendous flexibility, in practice, to determine just how much of their input or output costs to either hedge or leave unhedged. There is thus great potential for commercial speculation which cannot be measured by a facile distinction between commercial and non-commercial accounts.
Introducing “risk-adjusted margin”
There is another way, however, to try and estimate the degree to which certain commodity price increases are being driven by speculation rather than commercial supply and demand. This is to look at the “cost” of speculating, as measured by the amount of margin (or collateral) that the speculator must put up on the exchange in order to open a position in a given commodity futures contract. The less it costs to speculate, so the thinking goes, the more potential for speculation. [2]
In the table below, I list the initial margin requirements for a selection of major commodities and also the current notional contract value for each. I then calculate the margin required, in percent, to hold a speculative position in each commodity.
(As it happens, the CME has recently switched over to a percentage-based margin requirement for the metals that will automatically rise or fall in nominal terms with the value of the contract. In my opinion this entirely sensible change in methodology is long overdue and should be considered also for non-metals contracts.)
Source: CME Group. Data as of 13 January 2026
Taking a look at the far right column, it would appear that, at present, with the lowest percentage margin requirement, soyabeans are perhaps the commodity most open to speculation and natural gas the least. But this approach is incomplete in that it does not take into account the volatilities (risk) of the respective commodities. Some commodities are much more volatile than others.
In the table below, rather than simply divide spot contract values by margin requirements, I take the further step of calculating the volatility (or one standard deviation) of each contract. I then divide this measure of risk by the margin requirement to calculate margin per normalised unit of risk. This risk-adjusted margin (RAM) calculation gives a more complete picture of the “cost” involved in speculating on a given commodity. The higher the RAM, the higher the “cost”. [2]
Source: CME Group. Data as of 13 January 2026
There are several observations we can make here. First, at nearly 30%, wheat has the highest RAM at present, implying that speculators are unlikely to find it attractive. Soyabeans come in close behind.
Second, gold and copper have comparable RAMs, at about 20%. These lie above those for the major energy contracts, crude and natural gas, even though the latter are normally more volatile.
However, silver, on account of its much higher volatility of late, has a RAM of only 12%, well below the other metals and even below the major energy contracts. This could be seen as an invitation to those inclined to speculate.
So, while the CME may have hiked silver margins a great deal in recent weeks, when adjusted for the rising nominal contract size (by value) and much higher volatility, silver margins have not kept up enough to hold RAM at a comparable level to gold and copper.
Thus the idea that the CME is “ganging up” on silver speculators would appear not to be the case; rather, the CME is arguably, belatedly, playing catch-up. A case could be made that silver margins are likely to move higher still, until the RAM falls more in line with the other metals.
That said, if silver’s volatility settles down a bit over the coming days, which I consider likely, then the implied RAM will naturally increase to a more comparable level.
Defensive notes on the margin
Investors sharing my view that financial assets, stocks and bonds, are fundamentally overvalued in real, purchasing-power terms, should continue to accumulate gold and other precious metals. This can be done by owning the metals outright or through investments in mining and royalty firms. Although these performed well in 2025, when compared to the prices of the underlying metals, they still generally appear good value.
One should also note that industrial commodities are trading at historically inexpensive levels relative to the stock market. Basic industries such as traditional energy and materials are trading at reasonable valuations and in many cases pay generous dividends well above the rate of inflation.
As they say, diversification is the only “free-lunch” when it comes to investing. Seeking value in both precious and industrial commodity producers at present introduces an element of that into the portfolio mix, while also generating an inflation-protected dividend income.
[1] In this discussion we assume that the speculation that is taking place is in the form of buying rather than selling, pushing prices higher rather than lower, as this has been the trend with precious metals over the past year.
[2] Those familiar with the commodities futures markets are also aware of the roll yield (or carry cost) as a factor which can influence speculators. In this analysis, contract values could be adjusted higher (or lower) according to their positive (or negative) roll yields for a more precise analysis. I have not included roll yield calculations here because roll yields are currently lower than volatilities and, as such, would not impact the results meaningfully.