The Chicago Mercantile Exchange is raising margin requirements on gold on Friday morning (8/12/11). It will be interesting to see how the price of gold reacts to that change. When the CME raised the margin on silver, four times in a week as I recall, silver dropped nearly 40% (from $50 to near $30) in a few days. My own theory is there are many fewer buyers of gold on margin than there were in silver. That is, there is/was much more speculation in silver. Gold is a safety play by investors, many hold 10% to 20% gold in their portfolio for ballast and an inflation hedge -- and many countries and central banks hold gold as a diversification away from the dollar and they don't hold that gold on margin. What I do not know is how much gold is held by the multi-billion dollar hedge funds, gold in those funds could very well be margined, I have no idea. In any case, just watch the price of gold for the next 24 to 48 hours, and you might be able to get a good gauge on the amount of margined speculation in the yellow metal.
I think you hit the nail on the head with the lack of speculation making this margin hike less effective than the one silver had. Although a 22% hike is nowhere near the 84% hike silver had either. It looks like maybe they are just trying to keep it below Jim Sinclair's magical number of 1764, which he has said could cause a parabolic rise if gold broke out strongly above that. The volatility in gold right now is unprecedented.
This is just my opinion, but I think the increases in margin are a plus to the PM bull market. It shakes out the short term speculators and weak players, and puts the metal into stronger hands. So the short term pullback from the margin hike only serves to increase the probability that the price will eventually move higher and the bull market last longer. I am sure it isn't the CME's intent, but they are helping gold investors, not hurting them.
I agree with cloud that this does reduce speculation pressure, but does not eliminate any factor that is/was responsible for the world wide increase in the POG. Increase in margins is often seen as a conspiracy type of move, but it is a means to balance the call/short ratio in a high volatility market. The alternative of having limits ( max up/down per session) seems more of a problem than margins , IMO. Jim
I believe many are in cash over the weekend and will decide whether to stay in USD and gold or go to stocks depending on what the market does Mon and Tues. I have a feeling that stocks may present the best short term play, IMO. Jim
I think you may be right. Microsoft, Intel, Wal-Mart and Exxon are all selling for around 10 times earnings or less and nobody wants them. The risk seems pretty low at those prices.
Since the world's governments and central banks hold multiple 10s of thousands of tons of gold as monetary assets, what the CME does in regards to gold has little effect on the price of gold. Despite this margin increase gold is at a new record high today, only after this change was implemented.
Yes, Gold fell from over $1800 down to around $1730 or so with the margin increase (a small relative move) ... and now it's back up over $1840 an ounce. Such impressive strength. Nasty day in the stock market today. Dow was down over 500 points a little while ago. Keep your money in gold and silver!
I would think that the probability is high that the margin requirements will be raised again, and perhaps multiple times to try to kill the gold bull. But all this will do is knock out the speculators and leave the holders of physical. This isn't 1980 where the Hunt brothers controlled the market. There is no single buyer or group of buyers that can be targeted to prevent the price rise.
It seems sort of obvious that Gold is NOT heavily margined ... therefore why raise margin requirements?
I read an article on thebulliondesk.com this morning where an unnamed gold trader indicated another margin hike was likely. Of course you are correct that it is not logical to raise margin requirements when gold is not heavily margined, if the intent is to remove speculation. However a more likely intent is price suppression.
Gold futures are margined, and if the regulators can force gold longs to sell contracts, it impacts the price of gold due to the arbitrage opportunities it creates.
