Gold Price Dives as CME Hikes Margins

GOLD PRICE NEWS – The gold price dove Thursday morning after the CME Group raised margins on gold futures contracts by 22%. The price of gold traded to a new all-time high of $1,815 per ounce overnight before falling back to $1,775. Initial margin will climb from $6,075 to $7,425 and variation margin – for hedging purposes – will move up to $5,500 from $4,500. The move by CME led to liquidation in electronic trading on the COMEX.

TD Global Precious Metals team expressed caution with respect to gold prices, noting “With all the market and social chatter about the gold price, and the parabolic price action of the past week, it feels more and more like a text book blowout top. So caution is warranted for longs, and paramount for fresh longs, but as it has proven again this week, and numerous times in its decade long bull run, trying to pick a top in gold is a painful and expensive trade.”
Despite numerous calls for caution by Wall Street strategists, the gold price continues to post fresh record highs on almost a daily basis. The price of gold briefly surpassed $1,800 per ounce for the first time and maintained the large majority of its gains throughout the day. COMEX gold futures have displayed a marked increase in volatility, a key reason for the increase in margin requirements.

Gains have not limited to the gold price, however, as silver climbed 4.3% yesterday. The iShares Silver Trust (SLV), a proxy for the price of silver and the world’s largest silver ETF, surged 5.9% to $38.44 per share. Silver fell $0.28 to $38.99 per ounce early Thursday. Despite today’s weakness in precious metals, the prices of silver and gold have gained 26.0% and 25.2%, respectively, in 2011.

Gold shares have followed the gold price higher this week. The AMEX Gold Bugs Index (HUI) advanced 3.1% to 567.09 on Wednesday. Coupled with Tuesday’s 4.5% rally, the HUI posted its best two-day performance since an 8.5% surge on November 3-4, 2009. Three of the sectors largest gainers were HUI components Gold Fields (GFI), Harmony Gold (HMY), and Yamana Gold (AUY), which each jumped 5.2%. Gold mining stocks traded lower this morning on the back of lower gold prices and weakness in the broader stock and commodity markets.

Gold equities substantially outperformed the broader markets on Wednesday as the Dow Jones Industrial Average (DJIA) plunged 519.83 points, or 4.6%, to 10,719.94. In doing so, the Dow closed at its lowest level since September 17, 2010. Risk aversion returned in a large way as the CBOE Volatility Index (VIX) soared 22.6% to 42.99. The U.S. Dollar Index (DXY), which measures the greenback against a trade-weighted basket of fiat currencies, climbed 1.1% to 74.727.

One primary catalyst for the gold price rally and broader market weakness on Wednesday was escalating concerns that the European sovereign debt crisis was spreading to the euro zone’s second-largest economy, France. Rumors surfaced yesterday that Societe Generale – one of France’s largest banks – was facing liquidity issues related to its sovereign debt exposures. In addition, speculation arose that the ratings agencies were preparing to downgrade France’s credit rating from AAA status. However, Societe Generale’s CEO emphatically denied the speculation, and a French downgrade has yet to materialize.

As for developments in the United States impacting the price of gold, Bank of America Merrill Lynch raised its 12-month gold price target to $2,000 per ounce. According to the firm, S&P’s downgrade of the U.S. AAA rating is likely to further contribute toward an uncertain economic backdrop in which gold prices generally flourish.

The downgrade will also “probably increase the pressure on emerging market central banks to diversify their international reserves of U.S. dollars and into gold,” Bank of America wrote in a note to clients. Furthermore, the firm wrote that “With inflation expectations anchored by high energy prices, real interest rates should remain low and provide support to gold prices going forward.”

With respect to the Federal Reserve and its impact on the gold price, Bank of America estimated that there is a 40% chance that the Bernanke-led Fed will launch a third round of quantitative easing (QE3) within the next 12 months. This prediction echoed a call made by Goldman Sachs earlier this week that the odds of QE3 have risen above 50%, which would make the case for higher gold prices even stronger.