Precious Metal Margin Warfare Jumps The Pacific, As Shanghai Hikes Gold Margins For Second Time In A Month, Prepares To Crush Silver

Tyler Durden's picture

Wondering why gold dropped by almost $100 today? Wonder no more: today the Shanghai Gold Exchange lifted gold margins for forward contracts the second time this month to 12% beginning on Friday, in a move that is starting to resemble the CME's vendetta with silver back from May. Should we expect 3 more SGE margin hikes in the next 2 weeks? Or will the CME rightfully accept the baton and do everything in its power to dent the parabolic rise in the alternative reserve currency? We are cautiously looking at what the CME will do today and will advise readers. In the meantime, here is what else happened in Shanghai: "China’s main precious metals exchange will also widen daily trading limits for those gold contracts to 9 percent, up from 7 percent, the SGE said on its website on Tuesday. The contracts to be affected include Au(T+D), Au(T+N1) and Au(T+N2). This is the second time the exchange has raised collateral requirements on gold forward contracts this year — both times in August — as international gold prices hit a series of record highs over the past few weeks, boosted by a flight to safety on worries over a stalling U.S. recovery and crippling sovereign debt in the euro zone. Shanghai Gold T+D contract lost half a percent to 387.8 yuan per gram, or $1,884.47 an ounce, down from an intraday high of 391.9 yuan when the market opened."

More from Reuters:

“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,” said Li Ning, an analyst at Shanghai CIFCO Futures.

 

At a time of market turmoil, exchanges routinely increase the margin requirements to cover the risk of a default.

 

With the SGE’s margin requirement exceeding its daily trade limit, the hike seems aimed at squeezing some speculative froth out from the market, some traders said.

 

The Shanghai Futures Exchange could raise margins on its gold futures contract soon too, said Li.

 

The new margin would require an additional 490.4 million yuan ($76.6 million) to be posted to the exchange.

 

Trading volume on the most popular gold forward contract hit a three-month high of 26,032 grams on Aug. 11, and eased to just shy of 20,000 grams on Tuesday as the exchange finished the afternoon session. The average volume so far this month stood at 14,999 grams, compared to a daily average of 9,138 grams in 2010.

 

The exchange also said it was closely eyeing silver contract price movements and would consider raising trading margins, transaction fees or costs of rolling over forward contracts should volatility persist.

At least the cause is now known. And when the effect from the SGE has been priced in and diluted, it will then be the turn of the CME. Unless of course it is much sooner.

That said, to all those who have been looking for a dip in gold, here it is.