Gold Extends Biggest Decline in 18 Months After CME Raises Futures Margins
Gold fell for a third day, extending its biggest drop since February 2010, after CME Group Inc. (CME) raised futures margins for a second time this month, prompting some investors to sell the metal after a rally to a record high.
Bullion for immediate delivery dropped as much as 1.7 percent to $1,729.45 an ounce and traded at $1,742.38 at 2:43 p.m. in Singapore. The metal slumped 3.8 percent yesterday as better-than-estimated U.S. economic data boosted the dollar and cut demand for safe assets before central bankers from around the world gather on Aug. 26 for an annual meeting.
Gold has dropped 8.9 percent from its record $1,913.50 on Aug. 23 in “a correction that we have to have,” said Justin Smirk, senior economist at Westpac Institutional Bank, a unit of Australia’s Westpac Banking Corp. “Near-term there’s still a lot of reason for gold to outperform other commodities because we don’t think that problems are being resolved.”
Gold is in the 11th year of a bull market and has gained 22 percent this year as investors seek to diversify their holdings away from equities and some currencies. The metal is still up 6.3 percent in August, heading for its second monthly increase. Exchange-traded-product holdings, which reached a record 2,216.8 metric tons on Aug. 8, fell for a fourth day yesterday. Assets shrank 26.9 tons to 2,154.714 tons, the largest outflow since January, data compiled by Bloomberg show.
CME, the largest futures market, raised margins by 27 percent with effect from the close of business today, it said in a statement. The initial-margin requirement, or the minimum amount of cash that speculators must keep on deposit, will rise to $9,450 per 100-ounce contract from $7,425. The maintenance margin also rises 27 percent to $7,000 from $5,500, it said.
“It’s going to put some downward pressure on gold as investors are forced to stump up more margin to cover any positions they have,” said Darren Heathcote, head of trading at Investec Bank (Australia) Ltd.
The December-delivery contract fell 1.3 percent to 1,734.60 an ounce on the Comex. Futures, which touched their highest ever $1,917.90 on Aug. 23, tumbled 5.6 percent yesterday, the most since March 2008.
The CME joins the Shanghai Gold Exchange in hiking margins. China’s largest physical gold market will increase the trade margin requirement for its gold forward contracts for the second time in a month from settlement today, it said on Aug. 23.
“It’s not just the price move that day,” Harriet Hunnable, CME’s head of metals products, said in an interview Aug. 22, on why it alters margins. “It’s definitely not the price up or price down. When volatilities go up, we make a decision to put the market on notice that we will raise margins.”
Earlier this year, the CME announced five margin increases for silver after prices jumped to a 31-year high of $49.845 an ounce on April 25. In two weeks, it became 84 percent more expensive for speculators to trade the metal, triggering an exit by investors and sending silver down by the most since 1983.
Federal Reserve Chairman Ben S. Bernanke will deliver a speech tomorrow at Jackson Hole, Wyoming. At last year’s conference, he hinted at a second round of asset purchases to stimulate the U.S. economy.
Orders for U.S. durable goods beat economists’ forecasts while home prices increased the most since September 2005, trimming expectations of further so-called quantitative easing. The dollar gained against a six-currency basket including the euro and yen yesterday and was last little changed. Asian stocks rose for a second day.
The downgrade in expectations has “provided a decent backdrop for U.S. dollars,” Steward Hall, senior currency strategist at RBC Dominion Securities Inc., said. “Growth proxies were sold” and “gold, the traditional first line of defence against the monetary printing press, fell hard.”
Cash silver gained 0.5 percent to $39.935 an ounce, spot platinum was little changed at $1,812.25 an ounce and palladium climbed 0.5 percent to $751.63 an ounce.
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