Gold Falls after CME Raises Margins

By Leia Toovey- Exclusive to Gold Investing News

Gold prices hit a record of $1,814.95 an ounce on Thursday, but slipped as investors liquidated their long positions on the back of the CME Group’s announcement that it was raising margins on COMEX gold futures. Gold’s decline continued into Friday, as a rebound in equities increased appetite for riskier investments, at the expense of safe haven gold.

As of Friday morning, spot gold was down 0.7 percent at $1,752.31 an ounce, but due to aggressive gains earlier in the week, was still on track for its best weekly performance in 2-1/2 years. In London, gold bullion was down 3.6 percent from the record touched on Thursday.

Late-Wednesday, the CME announced that it would increase the amount of deposit required to trade gold futures products. Speculative investors are now required to put up $7,425 to open a position and maintain $5,500 of that to keep the position overnight, an increase of 22 percent. The new rules came into effect at the close of trade Thursday. The increase was modest, however, it still spooked investors. Earlier this year, a CME silver margin hike coincided with the metal retreating from a record rally.

While investors correlated the metal’s price decline with the CME margin hike, the CME claims that the two events were just a coincidence and not correlated. When the CME raised silver margins by a total of 84 percent between April 26 and May 5, silver prices declined 27 percent from April 29, which, according to investors, was due to the higher-margins forcing buyers who did not have enough funds out of the market. The CME told Dow Jones Newswires that the higher collateral requirements for trading gold futures are aimed at protecting investors and are in response to rising volatility.

Following the CME announcement, holdings in gold ETF’s fell by 23.6 metric tonnes, the most since Jan. 24. Despite the connection in timing between the margin increase and the abandonment of a large amount of ETF positions, according to Commerzbank, the liquidation was due to profit taking. “Some ETF investors clearly view the recent gold’s sharp price rally as exaggerated and have taken profits, as financial markets calm,” the bank said in a note.

Despite the end-of week slide in prices, analysts and investment firms are maintaining their bullish projections on gold prices. On Wednesday, S&P’s Equity Research Services unit made the recommendation to buy both gold stocks and miners. The equity research service unit is an independent branch of the S&P, separate from the Ratings Services division, which lowered its long-term credit rating on the United States last Friday.

Angelos Damaskos, chief executive officer of Sector Investment Managers Ltd, expects gold’s bull-run to continue, even though the price has already surpassed his firm’s end-of-year target of $1,800 per ounce. Damaskos thinks that in addition to keeping interest rates low, the US will most likely embark on a third round of quantitative easing, to stoke the nation’s ailing economy. That would reduce the appeal of the reserve currency, prompting investors and central banks to buy more gold.

Deutsche Bank stands firm on its 2012 gold price target of $2,000 an ounce with a bias towards even higher prices, saying the precious metal would benefit from the low interest rates in the United States. “We believe the main beneficiary of super low interest rates in the United States, a weak US dollar, a view that central bank holdings in the US dollar are still excessive and ongoing questions over the stability of the financial system will be gold,” the investment bank said. Despite the bullish predictions, the bank cautions that there is still a chance that a bubble will develop in the gold market.

In an interview with Bloomberg Television, Hayden Atkins, an analyst with Macquarie Group Ltd. (ASX: MQG), said that $2,000 an ounce is a “fair price” for gold. Bank of America Merrill Lynch (NYSE:BAC) has 12 month gold prices pegged at $2,000 an ounce, according to a research note JP Morgan Chase (NYSE:JPM) has the highest estimate, with researchers predicting that gold will hit $2,500 by the end of the year.

 

Securities Disclosure: I, Leia Toovey, hold no direct investment interest in any company mentioned in this article.

 

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