While the Chicago Mercantile Exchange (CME) increased margin requirements 22% on U.S. gold futures positions effective Thursday at close of business, a report by ETF Securities says that the move is likely not indicative of a trend toward additional aggressive increases.
The report, “CME Hikes Gold Margins 22%—What Does it Mean for the Gold Price?” says current volatility makes it unlikely that gold will come in for the same aggressive treatment that silver got in May, when CME boosted margins five times, resulting in a sell-off and a subsequent drop in price.
Although there is concern in the markets that such could be the case, says the report, “on our calculations, based on current volatility, average gold margin requirements have the potential to be increased by up to another 15% or so, bringing total margin increases to around 38%, less than half the rise faced by silver futures investors in May.”
The May price correction came after CME increased silver futures margin requirements by a total of 84% over April and May. Spooked investors dumped holdings as a result, and drove down the price.
In addition to the volatility factor for gold, the report says that both fundamentals for gold and investor foundations look stronger than those for silver did in May. This, it concludes, makes it less likely that there will be a direct effect by margin hikes on the price.
There is the possibility of a short-term correction, ETF Securities acknowledges, thanks to net speculative longs in COMEX gold futures topping one-year highs and gold ETP flows over the past month at their highest since May of 2010. However, the underlying factors of unresolved sovereign debt risk coupled with the Fed’s easy monetary policy make it unlikely that a correction will be more than short term.