Gold sells off on margin hikes

By 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.

Related Articles

• Beware a 35% correction in gold, analyst says
• Gold to rally into 2012, says S&P
• Cramer: European banks revisit 2008

"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 ActiveTradingPartner​s, 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.

• Check out Jim Cramer's portfolio

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.