Gold rebounds despite margin hikes

The metal ekes out a gain even after the CME raises margin requirements, as fear over Germany's economic strength spills over into US markets.

By TheStreet Staff Aug 25, 2011 10:19AM

Gold © Comstock Images/JupiterimagesBy Alix Steel, TheStreetTheStreet

 

Updated at 4:04 p.m. ET

 

Gold prices, which sustained early losses Thursday in the wake of a margin hike by the Chicago Mercantile Exchange, rebounded late in the day as a sell-off in Europe triggered a flight to safety. 

 

Gold (-GC) for December delivery gained $5.90 to settle at $1,763.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,771.10 and as low as $1,705.40 on heavy volume. The spot gold price was rising $9.70, according to Kitco's gold index.

 

Silver (-SI) prices rose $1.58, or more than 4%, to finish at $40.74 an ounce. The U.S. dollar index was up 0.3% at $74.28 while the euro was falling 0.3% against the dollar.

 

Gold prices staged a comeback Thursday after tumbling as much as 11% in the last few days. Worries that Germany's credit rating was in doubt and that its finances might not be as strong as previously thought led European markets lower, and the fear spilled over into U.S. markets.

 

Feeding the panic were concerns that the next bailout for Greece may be in doubt. Yields for 10-year bonds were soaring more than 18% as investors needed more incentive to lend money to the struggling country.

 

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George Gero, senior vice president at RBC Capital Markets, also attributed the rebound in gold to short covering -- traders who had been betting on a correction in gold were now buying back the at lower prices.

 

Gold initially plunged Thursday after the Chicago Mercantile Exchange stepped in and raised margin requirements by 27% -- that is, the amount of money it costs to buy a 100-ounce futures contract -- in response to gold's $100 one-day selloff. It now costs $9,450 to buy a 100-ounce futures contract and $7,000 to maintain it.

 

After falling more than $100 in one trading day, the CME stepped in and raised margin requirements -- that is, the amount of money it costs to buy a 100-ounce futures contract. After trading today it will now cost $9,450 to buy a contract and $7,000 to maintain it.

 

The CME last raised margins on August 11th by 22% and prices suffered just a modest decline. Overall, in 2011 margins for gold have increased $3,375 as compared to $11,137.50 for silver, suggesting that the damage to gold prices might not be as profound.

 

Although many experts acknowledge that gold prices could bounce, most seem to be anticipating more of a sell-off. Experts are looking towards the $1,680-$1,650 level to provide some support. Any good macroeconomic news out of the U.S. could also trigger more selling, as investors feel better about owning stocks and turn away from haven assets like gold.

 

"I believe that gold will temporarily hold in the low $1,700s," says David Banister, chief investment strategist at TheMarketTrendForecast.com, "and possibly even counter trend up into the $1,780-$1,810 range ... but I think following that there should still be some work on the downside."

 

Stanley Crouch, Chief Investment Officer of Aegis Capital, thinks there is more momentum traders to get washed out, there is "likely to be a lot more extremes of volatility." Crouch also believes that if there is a global slowdown economically then investors could "pull the plug on the commodity rally in general because as demand destruction occurs . . . and if the dollar strengthens relatively to the other currencies . . . gold would trade off in that scenario."

 

Ross Norman, CEO of Sharps Pixley, takes the opposite view. He thinks the fear premium has been taken out of gold -- that is that those investors who panicked over the fear of a double dip recession and ballooning debt loads have exited the market. The expectation that Federal Reserve Chairman, Ben Bernanke, might pull a rabbit out of his hat on Friday and announce more monetary easing to jump start the economy, and hence the stock market, sucked investors away from gold and into stocks.

 

"Gold prices have been rising at a compound 16.8% per annum since the bull run began 11 years ago," says Norman, who says that the rate of price increase has accelerated since 2008 to 20.3% as haven seekers entered the market. "The extra 3.5% compound could possibly be attributed to the so-called 'fear factor' or safe-haven role of gold. These assumptions being so, then removing that fear element in expectation of some positive noises from Bernanke would take us back to $1,720 -- exactly the current market price. In short, the fear premium has been removed."

 

The recent sell-off had many investors worried that gold's skid will echo that of 1980, when the price reached $850 and then did nothing for 20 years. But there are some fundamental differences. In 1980, gold climbed 193% in six months and then tanked 43% in the next two months.

 

Gold prices over the last six months have climbed just 32.87%, one sixth of gold's rally in 1980. So far in two days the price has tanked 9%. A 43% correction would lead gold to the $1,093 an ounce level. Crouch thinks that this sell-off could be more intense. "With the proliferation of ETFs and synthetic instruments, (they) allow very quick and very large assets with large volumes of capital in addition to being able to leverage the trade . . . I think it will be exacerbated."

 

But there are two factors that might prevent a 1980 gold scenario from happening -- central banks and China.

 

Central banks have become net buyers of gold rather than net sellers in the last two years. According to the World Gold Council, central banks have imported 198.4 tons of gold in the first half of 2011 whereas two years ago they were selling 450 tons a year. China, another key demand player, has "gone from net neutral to a positive demand effect of 300 tons per annum," says Marcus Grubb, managing director at the World Gold Council.

 

China accounted for 6% of total global demand in 2000. That number has now surged to 18% in 2010. Grubb even estimates that China could have imported more than 260 tons by April, surpassing its imports for all of 2010. Those numbers are expected to remain high as investors rush to gold as an inflation hedge. Prices were up 6.5% in July.

 

These are two big factors not really present in the gold market in 1980. The selloff in gold also corresponds to a seasonally strong buying period for the metal -- the start of India's wedding and festival season. India is a price sensitive consumer and a big drop in prices might be a catalyst to start buying the physical metal.

 

Short-term, however, the gold market looks bleak. The jury is out as to what Bernanke's speech will bring Friday. Stephanie Link, director of research for TheStreet, thinks no new money printing will emerge and that investors will turn their focus on the macro picture and corporate earnings, a bit of a wild card currently. More bad macro data might help gold's safe haven bid, but Wednesday's durable goods orders for July ignited some optimism.

Nick Brooks, head of research and investment strategy for ETF Securities, says that "normally you would say any hint at quantitative easing, which is what markets are hoping for, would normally be good for gold, in the medium to long term ultimately it is good for gold . . . but to the extent that there is a hint at quantitative easing and that improves risk sentiment, we could see a gold correction."

 

Gold mining stocks closed mostly higher Thursday. Barrick Gold (ABX) rallied 2% to $49.99 and Newmont Mining (NEM) added 1% to finish at $60.83. Randgold Resources (GOLD) slipped 0.5% to $104.27, while Goldcorp (GG) gained 2.3% to end the day at $50.58.

 

11Comments
Aug 25, 2011 12:47PM
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The Price of gold is not over valued. The only reason the price is dropping is because the Government is making those buying into the futures market pay a premium to hold them.  You want the actual value of gold. take the price of 100 oz's and add the premium and the maintenance cost and that is the current value.  The government doesn't want you to hold gold, they want you spend their dollars!  They need sponges to suck up the money supply to make it worth more! They are trying to control the price so true inflation isn't shown.  They just did the same thing to the silver markets a month ago.  There is only one thing in this world that cannot be produce and that is Gold. There will never be more or less of it because cannot be destroyed or made. It's value is intrinsic and not based paper.  If government didn't intervene the price of Gold would be over $5000.00 per oz.  There is a reason banks hoard it. Only tangible thing actually have worth. Here is the thing most people fail to see. It really doesn't matter what the price of gold is because when it come time to use it's value to purchase something. That same oz of gold will buy it unlike the dollar. Every year it takes more and more dollars to buy those same eggs, milk, cars, houses, or EVERYTHING. Lets face facts the Government has created so much paper money out of thin air. No one as earned these trillions of dollars which means they have no value in and of themselves. They simply water down the rest of the money supply meaning that instead of a glass of water to buy your groceries.  You need to bring a barrel.  Here's a clue. No time in history did paper currency ever increase in value compared to something tangible.
Aug 25, 2011 2:54PM
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LOST OE.....Hope you and family do fine?     Smile

 

Take it cool on the rest of us suckas.Tongue out

 

No one;Needs the Stock Market to fail,especially America.Sick 

 

 

Aug 25, 2011 2:50PM
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" 100-ounce futures contract. After trading today it will now cost $9,450 to buy a contract and $7,000 to maintain it "

Why not make the b@stards just pay the full per ounce price?
And people wonder why everything is so screwed up.

RON PAUL 2012
Aug 25, 2011 1:54PM
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LostOnEarth

 

If the the $$$$ gains you claim by investing in  gold are really "real" then good on you but your sick attitude towards the rest of your fellow man shows just how shallow a person you really are. Of course you could also be just one more of the BS'ers  who also claim to catch the top of the market when they sell.

Aug 25, 2011 2:57PM
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they got the weak players out and watch gold hit 2000+ by end of year and 2500+ by fall of 2012 all because the Black SheepLE will be cooing and awing over the KING OF SOCIALISM!! smart people do what smart people do........!!
Aug 26, 2011 2:59PM
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gold has had a value sense the beginning of time and it always will. you can't make it or print it ! gold is a way to store your wealth and keep it!  some jack-**** can't debase it like paper backed by nothing. the short term fix will be qe3 (which won't work) and it will bring gold higher and higher. most people who talk crap about gold work in the stock market and can't make money off it like stocks, whether it's up or down their fees are paid!  can't put jonny through school that way!
Aug 26, 2011 9:15AM
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ATG2112...

 

We would have avoided the entire housing mess if we followed your advice!   No more borrowing of money to make large purchases!

 

Since a single contract for gold is 176,300 it makes sense to regulate MARGIN.  Stocks require 50%.  Margin has always been dangerous.  You are gambling with other peoples money.  But you STILL have to settle with cash.

 

As long as the buyer has the cash and the seller the goods, they can enter into any contract they  want. 

 

This is why we need a regultae banks.  They should not make any mortgage loan without 25% down. 

Aug 25, 2011 11:58AM
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The house of cards and bigger fools will fall.  Like I said when Cramer was urging people to buy at the all time historic high - DZZ is much better play.  It's up around 20% since I called it 2 days ago.
Aug 26, 2011 10:35AM
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In my view, gold has no intrinsic value. It only has value because people believe it to have value. It is kind of like religion when I think about it. In my opinion, the real intrinsic value is creativity of the human spirit. It is that certain feeling that something unknowable, but reachable is just beyond us. It what all great artists, scientists, philosophers, leaders, all great men intuit. Gold to me is like the difference between paper and literature. The creation of literature is far beyond paper. Gold creates nothing and produces nothing. 
Aug 25, 2011 10:52AM
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Time for gold value to drop to saner levels.  There is no reason gold should be this high-it has hurt our small jewelry business and the high prices are not realistic as far as this metal is concerned.

Gold is a commodity, and trading in gold is speculation.  It will drop-it's a bubble ready to deflate. 

Those who make a large profit are those who move gold by the ton-millionaires.  Small speculators are amateurs and will be fried as gold plummets.  It's not an investment. 

Aug 25, 2011 12:54PM
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I sold all my gold 3 days ago at $1,860 an oz. before all the ridiculous fees kicked in. And most of my gold I purchased at $500 an oz. and some later at $700 an oz. I more than tripled my investment. Not bad at all! Now I will really enjoy my retirement with my family and kids. Hot

 

May you all continue losing your money in all your investments on Fraud Street! May the farce be with you! SUCKERS! Crying

 

Glad to see stocks down over 150 points today. DIE STOCK MARKET, DIE! Wilted rose

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