A Word About Precious Metals Margins

There has been a bit of misinformation and faux outrage about the CME margin requirements for Gold, Silver, and other precious metals, as well as Copper.

I do not think people understand what this means, and why the CME is doing this.

To begin with, commodities are purchased with futures contracts, which offer enormous leverage to speculators. As of this Monday, the minimum cash deposit for trading gold futures will be $11,475 per 100-ounce contract — at $1700 per ounce, that is a $170,000 position. The leverage is nearly 15 to 1. Stocks and bonds, for comparison, trade at 2 to 1 maximum leverage using firm margin. At 15-1, a less than 7% move against you wipes out your capital entirely.

Put it in other terms, if you have $100,000 to speculate with, you can purchase $200,000 worth of stock, or using the same $100k, you can buy $1,481,481.48 in gold futures.

Back in Q1 2009, when Gold was $1000 per ounce, you only needed $5,807.70 to buy 100 ozs of gold in futures (worth $100,000); That’s a little more than 17 to 1 leverage. At those levels, a less than 6% move against you wipes out your capital.

Hence, as Gold has been purchased by more speculators who are highly leveraged, the exchange is trying to ensure that these gold traders have sufficient posted cash as a margin of safety in case of any significant move against them.

Given the vertical spike in Gold prices the past few months, this is merely prudent risk management. Call it managing margin and counter-party risk — something we haven’t seen in other non exchange traded items like CDS or CDOs. Had they been exchange traded with margin rules, perhaps the 2008 collapse would not have been as significant as it was.

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The recent history of CME margin changes for Comex 100 Gold Futures is after the jump.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Following are the percentage changes in the Comex 100 Gold Futures <0#GC:>
initial and maintenance margins since 2009  (in U.S. dollars per contract)

EFFECTIVE DATE   MARGINS FOR      INITIAL    MAINTENANCE   PCTCHANGE
Sep 26, 2011     Spec...Tier 1   11,475.00   8,500.00      +21.4
Aug 25, 2011     Spec...Tier 1    9,450.00   7,000.00      +27.3
Aug 11, 2011     Spec...Tier 1    7,425.00   5,500.00      +22.2
Jun 20, 2011     Spec...Tier 1    6,075.00   4,500.00      -10.0
Jan 21, 2011     Spec...Tier 1    6,751.35   5,001.00      +11.1
Nov 16, 2010     Spec...Tier 1    6,075.00   4,500.00      +05.9
Apr 30, 2010     Spec...Tier 1    5,738.85   4,251.00      -14.9
Mar 02, 2010     Spec...Tier 1    6,747.30   4,998.00       --
Feb 12, 2010     Spec...          6,747.30   4,998.00      +24.9
Dec 15, 2009     Spec...          5,402.70   4,002.00      +20.1
Aug 21, 2009     Spec...          4,499.55   3,333.00      -16.7
Jan 22, 2009     Spec...          5,398.65   3,999.00      -07.0
Jan 08, 2009     Spec...          5,807.70   4,302.00       --
(Reporting by Soma Das in Bangalore; Editing by Bob Burgdorfer)

Source: Reuters