Why Higher Gold Margins Do Not Matter to Gold Prices (CME, GLD, IAU, GDX, GDXJ)

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Less than two months ago, CME Group Inc. (NYSE: CME) lowered margins on its 100-ounce Comex gold contracts in what the company said was part of its “normal review of market volatility to ensure adequate collateral coverage.” The margin requirement was cut by 10% for both new and maintenance contracts.

Today, Comex raised its margin requirements by slightly more than 22% on the same contracts for the same reason. Before the margin drop in June, a non-commercial (speculative) contract cost $6,751. The margin fell to $6,075, and has jumped today to $7,425. At $1,800/ounce, a hundred ounces of gold is worth $180,000. The new margin represents just 4% of the value a 100-ounce contract. Does anyone really believe that the higher margin is going to put the brakes on the rampaging gold market?

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Gold has fallen from an opening price of $1,795 to around $1,760 this morning, a drop of about 1%. That is more equity market-driven and Euro-news driven than anything to do with margin rates.  The SPDR Gold Trust (NYSE: GLD) fell about -2% in the first hour of trading, as did the iShares Gold Trust (NYSE: IAU). The Market Vectors Gold Miners ETF (NYSE: GDX) is off about -1.2% and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) is actually up about 0.5%. None of these declines will be anything but temporary because even the slightly better news on US unemployment claims doesn’t change the fact the global economy is getting weaker.

Demands for austerity only make the economic issues worse because austerity will only increase unemployment. Fewer people working only reduces demands for goods and services, and it is lack of spending that is weakening the economy. This set of events just increases the appetite for gold.

Another issue that has driven gold to new highs virtually every day recently is its value as a safe haven from the volatility in the equities and commodities markets which was exacerbated by the downgrade of US debt. Whatever one thinks about the move by S&P to lower the US debt rating, the fact is that if US debt is no longer ‘AAA’-rated, does any other sovereign debt deserve the coveted ‘AAA’? France or Germany? With all the concern over Greece’s problems, the issues in Spain and Italy could make the Greek issue look small. No Eurozone country can escape the shadow cast by the weakness of several of its member nations, and to think so is fantasy.