Gold, silver plummet on margin hikes, dollar rally

Prices continue to tumble as the CME again increases the amount of upfront money required to trade the precious metals.

By TheStreet Staff May 5, 2011 10:09AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet

 

Updated at 4:47 p.m. ET

 

Gold and silver prices were in free-fall Thursday after another margin hike from the CME and a rally in the U.S. dollar.

 

Gold (-GC) for June delivery tanked $33.90, or more than 2%, to settle at $1,481.40 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,522.10 before sinking as low as $1,476.80 on heavy volume. The spot gold price was down more than $42, according to Kitco's gold index.

 

George Gero, senior vice president at RBC Capital Markets, said that gold might see a pullback to the $1,450-$1,500 range "before recovery sets in."

 

Silver (-SI) prices shed more than 7% for the third consecutive session, falling $3.15 to settle at $36.24 an ounce, below the starting point of April's 31% rally.

 

The CME announced it would raise the amount of money it takes to buy a 5,000-ounce silver contract by 33%, the fourth increase in two weeks. As of May 9, the initial speculative margin will rise to $21,600.

Clearing houses and exchanges reportedly hike margins to make sure traders actually have the cash to back up their positions, which supposedly protects against volatility. The idea is that it shakes out the "hot" money, or big leveraged bets, from the market.

 

Stocks tanked as well after first-time claims for unemployment benefits unexpectedly jumped to 474,000 last week. The Dow Jones Industrial Average ($INDU) closed down 139 points, or 1.1%, to 12,584. The S&P 500 ($INX) was down 12 points, or 0.9%, to 1,335, and the Nasdaq ($COMPX) was down 14 points, or 0.7%, to 2,815.

 

Anthony Neglia, president at Tower Trading, has turned bearish on silver as promised after it broke below $38, saying "the next major level of support is $36 . . . If that level happens to fail, $32 rings a bell." Neglia is watching open interest volume to see when the metal gets oversold.

 

The problem is that silver's sell-off has been fast and furious, and it has taken gold down with it. The SPDR Gold Shares (GLD) dropped almost 5 tons on Wednesday, while the iShares Silver Trust (IAU) shed 521.8 tons, bringing its total to 626.49 tons for May.

 

But not all exchange-traded funds are seeing this kind of mass selling. Tim Harvey, a senior vice president at ETF Securities, said he hasn't seen any major redemptions from physically backed gold and silver ETFs in the U.S., the ETFS Physical Gold (SGOL) and ETFS Physical Silver (SIVR).

 

"I think it says that the people using us at the moment are the asset allocators and the investors. . . . If you're a day trader, I think you've been finding your access to silver through futures or other means, but if you've been an investor in silver for the medium and long term, you've been with us," Harvey said.

 

Harvey thinks the recent sell-off doesn't represent a fundamental shift in the precious-metals market. Inflation is still rising worldwide, with the U.K.'s reading at 4%, the EU at 2.7%, the U.S. at 2.1%, China at 5.4% and India at almost 9%.

 

High inflation and low interest rates lead to negative real interest rates (the interest rate minus the inflation rate). Even with the European Central Bank's recent rate hike, the real interest rate in the EU is still a negative 1.45%.

 

Investors flock to gold and silver in that kind of environment as their cash in the bank is worth less, making the metals a safe place to stash wealth. The ECB decision to leave rates at 1.25% was pressuring the euro and boosting the dollar, which was putting pressure on gold and silver. The U.S. dollar index was surging 1.4% to $74.15.

 

Some news that was overshadowed Wednesday was a report that the Bank of Mexico added 93 tons of gold to its reserve holdings recently, following Russia and Bolivia, which bought gold in the first quarter.

 

There have been rumors that China, which officially owns 1,054 tons of gold, is looking to add more gold, and the metal's 4% sell-off from recent highs might be a good catalyst.

 

"The corrections over the past few days have taken some of the overbought froth out of the markets," said James Moore, a research analyst at FastMarkets.com. "But with issues such as negative real interest rates, eurozone debt concerns and MENA unrest still ongoing, investors are still likely to view dips favorably, with a test below $1,500 in gold and $38 an ounce in silver likely to find fresh demand."

 

Harvey also believes that gold and silver will have to wait until Monday to get further direction. The London bullion market has had two shortened trading weeks, and with volume light, it's hard to get a feel for how the bullion market will respond to gold and silver's volatile ride over the past two weeks.

"It's still the capital of the bullion market," Harvey says, "so we are not going to be able to call this until we see what is going on next week."

 

Gold mining stocks, a risky but sometimes more profitable way to invest in gold, fell along with the metal and broader equities Thursday. Barrick Gold (ABX) closed down 2.7% to $46.83. AngloGold Ashanti (AU) sank 4.6% to $45.77, while Newmont Mining (NEM) dropped 3.1% to $54.69.

 

Goldcorp (GG) finished down 4.1% to $48.72 despite reporting solid earnings of 50 cents a share Wednesday on revenue of $1.2 billion. The fast-growing gold miner produced 637,600 ounces and sold 98% of it. Cash costs were $188 an ounce, including silver sales from its fully ramped-up Penasquito mine, and $504 on a standalone basis, higher than the previous quarter.

 

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5Comments
May 5, 2011 4:13PM
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I guess we can send a get well card to BP, Shell and Exxon?  I hope they don't lose too much money on this.

May 5, 2011 4:11PM
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looks as though the bubble has a leak..................benny quickly will patch it with 600 billion!Surprised
May 5, 2011 11:01PM
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May 5, 2011 11:14PM
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May 5, 2011 11:04PM
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