Margins on Gold futures have tripled

Here is an 11 year overview of the margin (maintenance) requirements to trade Gold futures contracts on the CME.

Follow along and your pattern recognition will develop.

I hope you didn’t think that the price of Gold moved based on demand from Indian jewellery merchants ?

While there are arguments abound whether it’s a measure of inflation, a store of value or even considered currency.

The chart below and my notes within suggest that more than anything else, Gold is a “financial instrument derivative”.

Gold prices seem to be influenced by the futures margins which are set by the CME, which in turn fuels or repels the speculators.

Where the price of Gold typically falters (or is stifled) is when the percentage of the required margin creeps above 4% of the notional contract value.

The eliptical area in the chart is a period when the margins were closer to the 5% of the notional contract value, which is similar to today.

Over the past 2 years, the margins required to trade a Gold futures contract have tripled while Gold has risen 67%

What if the CME increases margins by another 25% or 50%?

by Rob Zdravevski
September 5, 2020

Gold exploration declines by 55%

English: Pouring molten gold into ingot mold a...

The volume of drilling activity in the global gold industry has fallen by 55 per cent in the past 12 months, new data from research group IntierraRMG has found.

Less exploration means supply.

Less gold supply should mean a higher gold price, ONLY if gold demand stays steady or rises.

Such a scenario will benefit gold companies who have a proven resource.

Often, the best thing such a company can do, is to leave the gold in the ground rather than spending hundreds of millions of dollars trying to extract it.

Management who think that success is measured by how much gold they “pour” can prove to be a handicap for its company’s share price, especially when capital is scarce.

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