Gold price for the past two days was plunging the most since December 2008 after dropping more than $160. So, what caused the gold price to plunge? Is it the margin hike by the CME? Is it a sell off by hedge funds? No, but it’s the margin hike by Shanghai Gold Exchange (SGE) by 12 % on Tuesday that triggered the sell off.
According to SGE it is increasing the margin requirements for gold forward contracts by 12% beginning on Friday. This is the second hike this month and bringing the total margin hike of 26%.
Furthermore, according to the Exchange, they are also widening the daily trading limits to 9% from 7% for gold contracts Au(T+D), Au(T+N1) and Au(T+N2). Trading volume on the most popular gold forward contract Au(T+D), hit a record of 26,032 grams on Tuesday.
According to Li Ning, analyst at Shanghai CIFCO Futures, “the margin hike by SGE is a pre-emptive move in case prices crash and cause volatility in the market, the exchange also said it is eyeing on the movement of silver and would consider raising trading margin should volatility persist”
Trading correlations are breaking down, watch out!
Another reason is the gold holdings in the world’s largest gold ETF – SPDR Gold Trust fell by 25 tons. This represents the biggest outflow of the physical since January.
Trading correlations are also breaking down. Stocks are going up despite bad news. SPY/GLD inverse correlation also breaking up, meaning both SPY and gold going down simultaneously. This is not a good sign for the market, as it indicates that the big boys are getting out. The hedge funds playing SPY/GLD arbitraging, will get burnt if the above correlation breaks down, and eventually cause further deleveraging from hedge funds.
Finally, another reason is that durable goods order are better than expected, and hence, there will be no risk of double-dip recession. So the chances for Bernanke calling for QE3 in his speech in Jackson Hole is rather slim. Without the risk of a double-dip recession, the likelihood of a recession is pretty slim, but is it US Boom Time ahead then?
Latest being last night, CME raised the performance bond or margin hike for gold futures by 27% following a 12% hike by their Chinese counterparts across the Pacific two days ago. As we have said in our earlier article, CME will do a ‘silver on gold’ and they say a further hike is possible if volatility persists.
So for those investors who missed the boat or have not loaded up enough gold during the last run up, they can now take their time to accumulate the yellow metal.
- Malaysia Chronicle
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