Saturday, 5 November 2011

Confusion over futures markets for Monday: good or bad for gold?

The CME - Chicago Mercantile Exchange - runs the US commodities futures markets including gold and silver. It said on friday that it was changing the margin requirements - this means that traders have to put up more of their own cash to participate in the market.

In the past increased margin requirements have been associated with large drops in the price of precious metals and therefore any gold ETFs.

In some quarters CME margin calls are seen as part of a concerted effort to undermine precious metals (see Bart Chilton below!) when investors are looking for safe havens for their cash.

Some of the potential impact of the CME's changes were discussed on Eric De Groot's blog here.

It quotes another story saying the changes imply "that options and futures holders will be forced to deposit addition capital to the CME in the form of maintenance margin, simply to hold their positions. This will put markets under pressure on Monday."

But a further announcement and correction from CME attempted to neutralise this fear: "We apologize for any confusion our initial advisory may have created." Instead it said that it had made it cheaper for people to buy and sell futures to make life easy for MF Global clients transferring their holdings after the firm went bust.

But Tyler Durden at Zero Hedge says the move - making it cheaper for people to buy commodities futures contracts - could make matters worse: "Because while the lower Initial margin may apply to MF accounts, it will also apply to any Tom, Dick and Harry beginning Monday, who will suddenly see a 30% reduced gating threshold to put on a position. Any position, no matter how risky.

"Naturally, if enough people suddenly jump to put on risk, and the market flips and all new positions end up underwater, who will bail out CME accounts if, like MF, there is just not enough capital on the balance sheet? MF Global?"

I hadn't spotted this from last week either: CFTC Commissioner Bart Chilton on King World News saying that criminal things have been going on in silver market.

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