24 August 2011

Gold Margin Hikes and a Pullback: Variations on a Theme

The reason for dropping of the sell orders and associated derivative bets, lifting of gold into the oxygen depletion zone, with a subsequent series of bear raids, is obviously in honor of the September options expiration this week on the Comex, and the Jackson Hole speech of Mr. Bernanke regarding the Fed's next steps on currency debasement.

But for those who were looking for a margin increase, do not despair. We forget that there is a new kid on the block. Eric McWhinnie at the Wall Street Cheat Sheet reminds us that:
"The prior sharp selloff was seen on August 11. This is significant because the CME increased gold margins by 22%, effective after the close of business on August 11. The same beat down method seen in silver months earlier, was seen in gold. However, gold recovered quite well until yesterday’s sharp selloff. So what caused this familiar selloff in gold and silver? Another margin hike!

Late Tuesday, it was announced that The Shanghai Gold Exchange increased gold margins for forward contracts, the second time this month. Li Ning, an analyst at Shanghai CIFO Futures said, 'Gold prices on the global market have been rallying strongly and at an increasingly faster pace. The margin hike is a pre-emptive move in case prices crashed and caused great volatility in the market. The Shanghai Futures Exchange could raise margins on its gold futures contract soon too.'”
I doubt very much that the Shanghai forwards increase caused this pullback. More likely Shanghai saw the setup for this week as I did last week, and sought to protect itself.

But nonetheless it is a good reminder that this is not your father's gold market anymore, with new players and exchanges entering the game, but perhaps it will be more like your great-grandfather's gold market over time.

This too shall pass. The tune may change, but the fundamentals remain the same. Banking cartels do not create wealth; they can merely attempt to confiscate and redistribute it, as stealthily as possible. And therefore bullion is their enemy since it forces them into the open.