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Silver Slumps -- Let's Also Drop Oil Prices

Stocks in this article: DBS

NEW YORK ( TheStreet) -- If anyone needed proof of the power of speculative bets in commodity markets, the last three days of silver's price decline settles all doubts.

Silver's drop of almost $12, or 25%, in less than 72 hours is a direct result of chasing away the weakest retail customers and traders from this "poor man's gold." The avalanche of positions unwinding was initiated by increased margins assigned to silver futures by the Chicago Mercantile Exchange in the past week.

But now we've got to ask the question: What could similar measures for oil futures do for us regular Joes paying through the nose at the gas pumps?

The answer is, probably as much as a dollar a gallon, although it won't be quite as easy as raising margins in futures -- speculative oil money isn't as easily attacked as silver.

Let's imagine that the price of silver, or oil for that matter, is represented in layers of money. There is hedging money from producers and commercial end-users, representing the "real" fundamental participants who have set prices for commodities since futures markets were created.

On top of that, we have a layer of speculative interest from bigger institutional investors and traders, from pension plans and university endowments and dedicated commodity hedge funds.

Add to that a layer from smaller trade groups and funds that only dabble in commodities -- a smaller amount of interest individually, but collectively their force can be as great. Finally, let's add that last layer of purely speculative interest, from day traders and other retail investors working through commodity ETFs.

What you have, if I can push this analogy, is a seven-layer cake of capital, all voting on the price of the underlying commodity. Sometimes, it may be tough to see just how thick each layer is, but there is no question that increased money in any layer will lead to a thicker cake and a higher price.

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