Unsurprisingly, perhaps, given the recent gains in the gold price, the Comex operator CME Group announced another rise in margin requirements on gold futures yesterday – the second such rise this month. This has contributed to the selling pressure in the gold market seen over the last couple of days. But a comparison with the silver sector shows that the white metal’s sharp price decline in early May this year – caused in-part by CME’s consecutive hikes of silver margin requirements – has not derailed silver’s long-term prospects.
Chicago-based CME Group raised margin requirements for gold futures trading to $7,425 per 100-ounce contract for the first time on August 22, corresponding with an increase of 22%. Yesterday, CME Group announced a margin increase of 27% to $9,450 per 100-ounce contract. Many speculative investors were urged to eliminate positions after the CME Group’s announcement, since an increase in margin requirements will result in unmatchable margin calls for many traders. This in turn led to the elimination of positions resulting in a decline of the gold price to $1,750 per troy ounce in yesterday's trading session – a 9% draw down from its recent all-time high of $1,917 per troy ounce. The CME Group’s decision to raise margins is designed to reduce the volatility in the gold price.
Consecutive hikes in margin requirements in the silver sector back in May resulted in a 40% plunge in the silver price after it hit $50 per ounce. However, the silver price has recovered since then – though is still some way off its highs of earlier this year. Price development in the gold sector could take a similar course. Some are warning of a bursting gold bubble, but hard-bitten investors are likely to welcome gold’s price setback to build up new physical positions at lower prices. Renowned commodities investor Jim Rogers has repeatedly emphasised the gold remains well below its inflation-adjusted all-time high of around $2,300 per troy ounce – indicative that the biggest gains in gold likely lie ahead.
Moreover, experts believe that Asian gold demand will rise further – mainly driven by Chinese and Indian demand. India's Diwali festival of lights is just around the corner – an occasion where Indians give gold and silver jewellery to friends and family as gifts. Furthermore, escalating inflation in China is spurring a capital flight by Chinese into safe havens such as gold. And according to the US banking giant Morgan Stanley, central banks won’t be selling their gold anytime soon. All of these factors will continue to provide good support for gold prices.
