Cash Gold Extends Biggest Drop Since February 2010 as CME Raises Margins

Spot gold declined, extending its biggest plunge since February 2010, after CME Group Inc. increased margins on trading at its Comex unit for the second time this month.

Gold for immediate delivery slid as much as 1 percent to $1,742.31 an ounce before trading at $1,750.90 at 7:12 a.m. in Singapore. The price slumped 3.8 percent yesterday, the most since Feb. 4 last year. Futures fell 0.3 percent to $1,751.70 after plunging 5.6 percent yesterday, the most since March 2008.

The minimum cash deposit for borrowing from brokers to trade futures will jump 27 percent to $9,450 per 100-ounce contract in the speculative Tier 1 category at the close of trading today, CME said. On Aug. 11, the increase was 22 percent to $7,425. The cost of one contract after yesterday’s close was $175,730. The maintenance margin increases to $7,000 from $5,500.

Cash bullion tumbled more than 7 percent in the two days to yesterday, erasing gains that sent the metal to a record $1,913.50 an ounce. On Aug. 16, Wells Fargo & Co. said in a report that rising speculative demand from investors had pushed the market into a “bubble that is poised to burst.”

“This is liquidation from a crowded trade,” Adam Klopfenstein, a senior market strategist at MF Global Holdings Ltd. in Chicago, said in a telephone interview. “In the short run, there’s more optimism and that doesn’t bode well for gold. Investors have been using gold more as a fear barometer than a proxy for inflation.”

Equities, Dollar

U.S. equities gained yesterday after reports on durable- goods orders and home prices beat analyst forecasts. The dollar rose against a basket of six major currencies amid speculation about whether Federal Reserve Chairman Ben S. Bernanke will say this week that the central bank is willing to provide more stimulus to the economy. Central bankers meet this week in Jackson Hole, Wyoming, to address the U.S. recovery.

“The motions that you are seeing are now indications of a market pop,” Erik Davidson, deputy chief investment officer at Wells Fargo, said in an interview. “People should keep in mind that a reserve currency does not fluctuate as much as gold.”

Gold has gained 23 percent this year as burgeoning global debt crises and turmoil in equity markets boosted the appeal of the metal as an alternative asset.

Europe is on vacation and the sovereign-debt fears are being addressed,” Frank Lesh, a trader at FuturePath Trading, said in a phone interview from Chicago. “The currency markets are pretty stable and not scaring anybody at the moment.”

Soros, Mindich

In the second quarter, George Soros and Eric Mindich cut their holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by the metal. Paulson & Co., the U.S. hedge fund run by John Paulson, maintained its position of 31.5 million shares, the biggest stake in the ETF.

The SPDR Gold Trust surpassed its equities counterpart as the biggest ETF by market value on Aug. 19. On that day, the bullion fund’s market capitalization rose to $76.7 billion, driven by rising prices. SPDR S&P 500 ETF Trust, which had been the industry’s largest ETF since 1993, stood at $74.4 billion.

“We exited one third of our gold position yesterday, and in retrospect we should have exited 150 percent of our long position,” Dennis Gartman, an economist and the editor of the Gartman Letter, wrote yesterday in his daily report. “The biggest news of all, in our opinion, was that the capitalization of the” gold fund had surpassed the equity ETF.

ETP Holdings

Gold fell from a then-record when CME raised margins on Aug. 11. The Shanghai Gold Exchange said higher margin requirements will go into effect from settlement on Aug. 25.

Holdings of bullion-backed ETPs fell for a fourth day, sliding 1.2 percent to 2,154.7 metric tons, data compiled by Bloomberg show. Assets reached a record 2,216.8 tons on Aug. 8.

“Gold got pushed up on the idea that Bernanke will announce further quantitative easing,” said Patricia Mohr, a commodity-market specialist at Scotia Capital. “Now people are not so sure whether that will happen and that is creating disappointment in the gold market.”

The decline may be a buying opportunity to some investors, said James Dailey, who manages $200 million at TEAM Financial Management in Harrisburg, Pennsylvania.

“A lot of traders and investors who are long-term bullish on gold sold out hoping for a correction because of how much it went up,” said Dailey. “The drivers remain intact. The toughest thing to do is stay invested during the various parabolas and sit through the corrections.”

To contact the reporters on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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