In what appears to be a counter-intuitive move, CME Group Inc. (NYSE: CME) today raised its margin requirements for copper futures contracts. The requirement rose by 15%, from $6,750 to $7,763 for an initial contract and from $5,000 to $5,750 on a maintenance contract. That works out to a margin cost of about 9.6% on a new contract for 25,000 pounds of copper at around $3.24/pound.
Copper prices have dropped by more than $1/pound from around $4.50/pound at the beginning of August. CME raised the copper margin by 18% on September 24th, so this is the second rise in just over two weeks. At the same time as the last rise, CME also raised the margin requirements on gold by 21% and silver by 16%. CME’s rationale for raising margin requirements is based on what it calls a “normal review of market volatility to ensure adequate collateral coverage.”
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CME’s move has probably played a part in lifting copper mining stocks Freeport-McMoran Copper & Gold Inc. (NYSE: FCX) and Southern Copper Corp. (NYSE: SCCO), as well as gold miners Newmont Mining Corp. (NYSE: NEM) and Barrick Gold Corp. (NYSE: ABX), and silver miner Silver Wheaton Corp. (NYSE: SLW).
If copper margins are rising today, can requirements on gold and silver be far behind? The margin requirement for a speculative trader to open a position on a 100-ounce gold contract is $11,475. At today’s price of around $1,648/ounce, that’s just 7% of the value of the contract.
The margin requirement for a speculative 5,000-ounce silver contract is $24,875. At today’s silver price of nearly $32/ounce, the value of a contract is $160,000. That calculates to a margin requirement of about 15.5%.
The rise in margin requirements last month put a damper on prices for all three of the metals. That isn’t happening with copper today, as the price is up nearly 5%. The news that the European Central Bank is offering essentially unlimited additional emergency loans to eurozone banks is putting some air under all markets today, and the commodities markets are not excepted.
Still, there’s a nearly certain chance that CME will lift its gold and silver margin requirements again. The margin on gold contracts seems particularly out of kilter given the 15% requirement for both silver and copper. But if today’s market reaction is any indication, margin requirement increases don’t play as big a role in metals trading as might be thought.
Freeport’s shares are up about 1.5%, at $34.97, in a 52-week range of $28.85-$61.35. Southern Copper’s shares are up nearly 2.5%, at $27.04, in a 52-week range of $22.58-$50.35. The iPath DJ-UBS Copper Total Return Subindex ETN (NYSE: JJC) is up nearly 3%, at $41.95, in a 52-week range of $38.99-$61.69.
Gold miner Newmont’s shares are up about 0.5%, at $63.33, in a 52-week range of $50.05-$71.25 and Barrick’s shares are up about 1.5%, at $46.98, in a 52-week range of $42.50-$55.95. The SPDR Gold Trust (NYSE: GLD) is up about 0.2%, at $159.74, in a 52-week range of $127.80-$185.85. The Market Vectors Gold Miners ETF (NYSE: GDX) is up about 0.7%, at $55.28, in a 52-week range of $50.42-$66.98. The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) is up more than 3.5%, at $29.21, in a 52-week range of $25.22-$44.86.
Silver Wheaton shares are up about 5%, at $30.81, in a 52-week range of $25.35-$47.60. The iShares Silver Trust (NYSE: SLV) is up more than 3.5%, at $30.75, in a 52-week range of $21.97-$48.35. The Global X Silver Minters ETF (NYSE: SIL) is up nearly 4.5%, at $21.93, in a 52-week range of $18.74-$31.34.