Forced Liquidation

Forced Liquidation is the situation where open positions are offset by the brokerage firm holding the account, usually after warnings have been issued that the account is under-margined due to adverse price movements and failure to meet margin calls. Traders are always concerned of forced liquidation because it rebalances the portfolio to reduce the excess market risk under adverse market conditions. The broker has the right to offset the positions if the account holder chooses not to meet the margin requirements.

Farlex Financial Dictionary explains forced liquidation as follows. "A bank may force a borrower to sell his collateral in order to repay the debt. Likewise, a brokerage can force a client to sell securities if the client is unable to meet a margin call and preferred stockholders can (sometimes) force the liquidation of a publicly-traded company if it does not make preferred dividend payments". The forced liquidation phenomenon is something that speculators might often face, so they should be sure to use only a small portion of their portfolio for each trade. In case of investments in precious metals, the issue of forced liquidation can be particularly important. 

Forced Liquidation in Gold & Silver

While the speculative trades risk of forced liquidation is similar in case of gold and silver as it is with other assets, the real difference is in case of the long-term investments and in case of purchasing gold as insurance. In particular, in the latter case, investors purchase gold in order to hedge their portfolio from exceptional financial turmoil (destruction of a commodity stock exchange, major change in the financial system etc.) and it would be a disaster (from a given investor's point of view) to see their hedge disappear due to forced liquidation, while it's would be about to soar in the following days. Consequently, long-term investors should make sure that they hold their precious metals in the form that is safe from forced liquidation - like physical bullion or investments in assets (or investment vehicles) that take such risk into account.