Gold sells off on margin hikes

After spiking to a record $1,817 overnight, prices fall as the Chicago Mercantile Exchange increases the amount of money needed to buy futures contracts.

By TheStreet Staff Aug 11, 2011 11:18AM

the streetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet

 

Updated at 2:48 p.m. ET

 

Gold prices settled lower Thursday after the Chicago Mercantile Exchange raised the amount of money it costs to buy a speculative gold futures contract and after gold spiked to a record of $1,817.60 an ounce in overnight trading.

 

Gold (-GC) for December delivery fell $32.80 to settle at a session-low $1,751.50 an ounce at the Comex division of the New York Mercantile Exchange. The spot gold price was losing $50.70, according to Kitco's gold index.

 

Silver (-SI) prices closed down 66 cents at $38.67 an ounce. The U.S. dollar index was down 0.2% at $74.69, while the euro was up 0.2% against the dollar.

 

The CME finally stepped in and raised margin requirements on gold -- that is, the upfront amount it costs to buy a 100-ounce gold futures contract -- after the metal skyrocketed more than $200 in less than a month. It now will cost $7,425 to buy a speculative contract and $5,500 to maintain it, both of which represent a 22.2% increase.

 

The CME deployed the same technique with silver in May when prices skyrocketed to almost $50 an ounce, which then led to more than a 30% decline in the metal. If the same were to occur in gold, prices would dip below $1,300 an ounce. However, gold seems to be shaking off the margin requirement, as investors have been seeking safety nets with the Dow Jones Industrial Average ($INDU) seesawing wildly, rising or falling by triple-digits every day this week.

 

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"We noted at the start of the week that a margin hike could dent the bullish sentiment in gold," says James Moore, a research analyst at FastMarkets, who along with other traders thinks gold could benefit from a period of consolidation. "But with little in the way of positive news in sight and threat of default/downgrades continuing to overshadow markets, gold will likely remain underpinned and could potentially extend to fresh highs."

 

Scott Redler, the chief strategic officer for T3Live.com, says that it's hard to buy gold at record levels but says, "I still expect significant upside due to continued demand. . . . It looks like (gold) is in the last stage of a parabolic move up to the $2,000 mark." His favorite gold investment vehicle is the SPDR Gold Shares (GLD) ETF.

 

Redler says not to chase gold's recent extension but "every sale so far has been a bad one."

 

Gold's frenzied rally has some long-time gold bugs worried. Legendary gold investor Jim Rogers has said that at the end of the gold bull run there will be a huge bubble in precious metals.

 

"I don't know when that will be," Rogers says. "Most long-term bull markets wind up in a huge mania, a huge bubble before it's over and this one will too. Someday, everybody will own gold. Someday, people will be walking down the streets checking gold prices in front-shop windows."

 

When asked if gold's recent rally qualified as this huge mania, Rogers said it was "not enough frenzy yet, but it is getting very worrisome. I want to keep my gold another several years, but who knows if this keeps up?"

 

David Banister, the chief investment strategist at ActiveTradingPartners, says that gold "could see a final surge to $1,862-$1,900, but that should top it for a while." Banister foresees a multi-month correction that will have gold trading sideways with some big drops along the way.

But for Thursday, gold remains an attractive haven, as even a $30 drop in the spot market price doesn't counteract the metal’s massive three-week rally.

 

Weekly initial jobless claims in the U.S., which fell to 395,000 last week, did little to calm jittery investors. Worries about the solvency of French banks and the country itself not to mention Spain and Italy are still resonating throughout markets, making gold the go-to asset.

 

A day after notching substantial gains despite the brutal sell-off in broader equities, gold mining stocks were mixed Thursday. Barrick Gold (ABX) was down 0.3% to $49.49, while Newmont Mining (NEM) was adding 3% at $57.48. Goldcorp (GG) was slipping 0.7% to $50.21, while AngloGold Ashanti (AU) was adding 2.9% at $45.62.

15Comments
Aug 11, 2011 3:08PM
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Stock Market, Precious Metal market. All manipulated.
Aug 11, 2011 11:51AM
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Reminds me of when the Hunt brothers tried to corner the silver market years ago and the number of people who got in just in time to lose their behind.  I had a good friend that the last time I visited him he was still using the silver bars he had to take deliver on as paper weights; cost him about $65K. 
Aug 11, 2011 3:49PM
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Be careful JUMBA, very,very careful. 8/31 is a long way out for these piranhas(sp).

 

NEVER......Never be afraid to take some of that profit to the table.

Sometimes, at least half.

 

This PEACH is getting too RIPE.....And listen to your wife NOW....So you won't have to listen to her when it's too late.

Aug 11, 2011 2:44PM
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Stock market looks like an EKG monitoring someone's cardiac arythmia.  Right now we're looking like closer to alive than dead...just hope some big money name doesn't decide he wants to pull the d-a-m-n plug!
Aug 11, 2011 1:17PM
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Well hell, I didn't expect anything else and I even fired a "warning shot" for the BUGgies.

 

A ain't no bug, but I damn sure follow them and they are getting nervous.

Jim Rogers is one of the best, but please Jim, don't suck us little guys into a 1250 p/toz.

 

We do not have the big bucks to play with and most of us are little gooses anyway.

It's "frenzy" enough for me; And the other half of my positions went yesterday.  Money

 

Now and yesterday,we have been catching and missing some "falling knives".

Have not got cut yet !!  Just grazed a little and tucked some away for next drop in AU.

Good luck to everyone else........ Hot

Aug 11, 2011 5:21PM
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Have the EU or US changed the fact that they handout the vast majority of Gov't funds to people who then refuse to work because of those lucrative handouts?

No? Well then nothing has changed. Portugal, Italy, Ireland, Greece and Spain all have massive nanny state Gov'ts. That's why they are broke now, and we will soon be as well.

I'm not sure where the top of the gold market will be, but the economy of any country where you are better off on the dole than at an entry level job is doomed to failure.

That sure makes gold attractive as an investment.

 

Aug 11, 2011 4:51PM
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true gold is volatile but when national debt is on a 15-30 trillion course you could argue the dollar is overvalued and volatile.
Aug 11, 2011 8:11PM
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I'm still betting on precious gold, oil and commodities and against those useless and worthless 401k's and Roth IRA's that everyone hates and produce nothing for the economy.

Aug 11, 2011 8:13PM
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I have yet to have ever met an employer that supports Unions.

I have yet to have ever met an employee that is against Unions.

I have met a few employees that once strongly supported Unions, go on to become employers that now strongly hate Unions.

 

MONEY MAKES THE WORLD GO AROUND AND THE PEOPLES MINDS TO CHANGE THEIR VIEWS! Eye-rolling Go figure!

Aug 11, 2011 3:43PM
Aug 11, 2011 10:28PM
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I sold the last half of our positions on the 8/9 and 8/10 on limits.

 

You do what you want to do.............Good Luck.     Money

Aug 11, 2011 10:18PM
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No problem betting on Gold , but the ones that bet the least usually lose the most.........

 

So if you go big or bet the Farm, make sure you have the deed signed,when they come a calling.

 

Otherwise get to the table and consider something else going forward. 

Aug 11, 2011 3:11PM
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I have leveraged everything I got on Gold right now. My wife said I was insane when I did but the payoff is incredible. I have to sell by 08/31/2011 to make good on interest is coming due. Gotta love the american dream. If you can't borrow it then you don't need it.
Aug 11, 2011 4:13PM
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Gold, as with all precious metals, is a commodity. Commodities are EXTREMELY volatile. Wise investors place high risk elements like commodities in the proper perspective. Only place a small percentage of your money in this investment. I saw a lot of folks get smoked in the 80's when gold dropped like a rock. Be careful Jumba. The SEC can change the rules quickly, they do not need congress or the fed to debate it. Thus little folks like you will not see the change until it is too late. 
Aug 11, 2011 1:53PM
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Nerd They are stampeding away like a bunch of *****looking for opportunity for a ******* moneys.
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