Friday, August 26, 2011

CME increases Gold margins

A few months ago I wrote some posts about the margin increases that were occurring as a result of the large moves higher in the Silver price. They provide some background to the following post, you can read them here:

CME Hikes Silver Margin Requirements (Again!) - March 25th, 2011

CME Increases Silver Margin Requirements - April 26th, 2011

CME gets aggressive with Silver margins! - May 5th, 2011

Did increasing margins break Silver in 2006? - May 6th, 2011

In August we've seen a couple of large increases (by 22% and then by 27%) in the margins required for Gold as it has recently soared higher by hundreds of dollars.

Once again there have been commentators (and comments on Twitter/Forums, etc) who have accused the CME of using these margin increases as a manipulative measure to control the price of the metals. However, as I pointed out in the earlier Silver posts, margin changes (up or down) are a natural part of a leveraged environment. They will rise and fall with the price of the metal (figures below show that Gold margins were DECREASED in June 2011, prior to their increases in August).

As I suggested on an earlier occasion I don’t understand why a fixed percentage (rather than a fixed dollar amount) wouldn’t be more appropriate as it would take all the guess work out of when the CME will increase margin. If someone more heavily involved in leveraged markets/COMEX trading understands why they don’t do this then I would appreciate you sharing any insight. I assume there is a simple explanation that I am overlooking.

There is speculation that the CME might end up releasing a flurry of margin increases at some point to truly break Gold's sharp spike higher, however I think such a move would be unlikely by the CME unless Gold put in a similar price move to Silver, which climbed by 150% in roughly 6 months. A similar move in Gold from the early July lows around $1480 would take the price to around $3700.

Here are the last 3 changes to COMEX Gold margins:

COMEX 100 GOLD FUTURES (GC)
Spec (Tier 1) - USD
Current Initial: 6,751
Current Maintenance: 5,001
New Initial: 6,075
New Maintenance: 4,500
Effective after close of business Monday June 20th.
Source

COMEX 100 GOLD FUTURES (GC)
Spec (Tier 1) - USD
Current Initial: 6,075
Current Maintenance: 4,500
New Initial: 7,425
New Maintenance: 5,500
Effective after close of business Thursday August 11th.
Source

COMEX 100 GOLD FUTURES (GC)
Spec (Tier 1) - USD
Current Initial: 7,425
Current Maintenance: 5,500
New Initial: 9,450
New Maintenance: 7,000
Effective after close of business Thursday August 25th.
Source

Resulting leverage allowed by above initial margins:

Date: June 20th, 2011
Spot Price: $1540
Contract Value: $154,000 (100 x $1540)
Margin Requirement: $6,075
Resulting Leverage: 25:1

Date: August 11th, 2011
Spot Price: $1760
Contract Value: $176,000 (100 x $1760)
Margin Requirement: $7,425
Resulting Leverage: 24:1

Date: August 25th, 2011
Spot Price: $1765
Contract Value: $176,500 (100 x $1765)
Margin Requirement: $9,450
Resulting Leverage: 19:1

With the last change higher in the margins we have seen a significant decrease in the leverage it allows.

It will be interesting to see how these margins change over the next few months whether we see a further rise or fall in the price of Gold.


BB.

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3 comments:

  1. Margins are required to protect the exchange in the face of price volatility. Nothing to do with price manipulation.

    The exchange doesn't care what the price is, they care that all participants are able to meet their obligation.

    ReplyDelete
  2. If it were a fixed percentage, it would require the funds to add or remove cash as collateral daily, this would create much more volatility as every little move would cause a potential margin call.

    ReplyDelete
  3. Thanks Gregory, that makes sense. Although one would hope if such a system was introduced it would simply lead to traders leaving a little more wiggle room in their accounts, rather than constant margin calls.

    ReplyDelete