Gold Slumps, Heads for Biggest Three-Day Drop Since October 2008

Gold Extends Biggest Slump in 18 Months
In the Diamond District in New York, business ebbed and flowed on August 24 as the price of gold has gone up dramatically and then fallen back down. Photographer: Glenna Gordon/Bloomberg

Gold fell, heading for the biggest three-day drop in almost three years, as investor demand wanes after a rally to a record.

Futures rose as much as 18 percent this month, touching an all-time high of $1,917.90 an ounce on Aug. 23, before erasing most of the gains. The value of a 100-ounce futures contract in New York plunged $10,400 yesterday, more than the $7,425 margin requirement that day, prompting exchange-owner CME Group Inc. to increase the minimum cash deposit on trades.

“It looks nasty, but this is a normal correction given the magnitude of the move,” Matt Zeman, a strategist at Kingsview Financial in Chicago, said in a telephone interview. “The parabolic move finally collapsed.”

Gold futures for December delivery fell $16.10, or 0.9 percent, to $1,741.20 at 11:57 a.m. on the Comex in New York. A close at that price would leave the most-active contract down 8 percent since Aug. 22, the biggest three-day slump since October 2008. In London, gold for immediate delivery was down $18.27, or 1 percent, at $1,741.05.

The metal is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify away from equities and some currencies. Central banks are adding to reserves for the first time in a generation, joining billionaire investors including John Paulson in hoarding bullion. The Federal Reserve has taken the unprecedented step of saying it will keep borrowing costs at almost zero percent at least through mid-2013 to support the economy.

‘Not Safe’

“Gold is a trade, gold is a position, gold is volatile, but gold is not safe,” Dennis Gartman, an economist, wrote today in his Suffolk, Virginia-based Gartman Letter. “The public is involved in gold, and the cab drivers of the world have bought into it. Now they are being taken out, at high cost.”

The Chicago-based CME raised margin requirements after gold futures surged to a record this month and then plunged the most since March 2008. The minimum cash deposit required to trade Comex futures will rise 27 percent to $9,450 per contract in the speculative Tier 1 category at the close of trading today, CME said late yesterday. The maintenance margin will rise to $7,000 from $5,500. The Shanghai Gold Exchange said Aug. 23 it will hike margins from settlement today.

“In our opinion, the margin is not nearly high enough yet,” Gartman said. “Proper margining would seem to be closer to $15,000 per contract.” Given the volatility in trading, “the exchange needs to protect itself and its clients” from the possibility of a large speculator or two putting “the exchange into jeopardy,” he said.

Speculator Holdings

Speculators held a net 218,403 futures and options contracts as of Aug. 16, U.S. Commodity Futures Trading Commission data show. Positions reached 253,653 contracts by Aug. 2, the most since at least 2006. The CFTC will update its tally tomorrow.

The 10-day historical volatility for gold futures jumped to 41 percent, the highest level since March 2009, data compiled by Bloomberg show.

Gold, which had fallen as much as 3 percent earlier, pared losses after U.S. equities resumed their slump. The Standard & Poor’s 500 Index is still headed for a weekly gain after declining 16 percent in the previous four weeks.

Silver Futures

After CME’s series of margin increases in April for silver, the metal slumped as much as 35 percent in the following three weeks. The price touched a 31-year high of $49.845 an ounce on April 25 and fell as low as $32.30 on May 12.

Gold’s surge and decline is similar to silver’s earlier this year, John Roque, WJB Capital Group’s senior technical analyst, said in a note to clients.

“Gold has some support at $1,700, but it wouldn’t surprise us to see the metal retest its last breakout level at $1,580,” Roque said.

Gold is still trading above its 200-, 100- and 50-day moving averages. The price is below the 20-day moving average of $1,743.50.

Silver futures for December delivery rose $1.124, or 2.9 percent, to $40.325 on the Comex.

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