Precious metals investors are debating whether a 22% increase in margin requirements to trade gold futures contracts will be enough to seriously derail the rally in gold exchange traded funds.
“There is some concern that the rise may be a precursor to more aggressive margin increases that might spark a sell-off similar to the silver price correction in May 2011 following an 84% increase in Comex silver futures margin requirements in the April-May period,” ETF Securities said in a report Friday. [Silver ETF Volume Explodes on Margin Hikes, Volatility]
However, based on current volatility levels, gold margin requirements are unlikely to be increased as sharply as those for silver in the spring, the analysts wrote.
Gold funds such as ETFs Physical Swiss Gold Shares (NYSEArca: SGOL) and SPDR Gold Shares (NYSEArca: GLD) have retreated this week after the Chicago Mercantile Exchange raised margin requirements to trade Comex gold futures contracts. Gold futures briefly traded over $1,800 an ounce for the first time this week. [Gold ETFs Weaken]
“Gold fundamentals and investor foundations appear stronger than those for silver in May, indicating that the gold price will be less directly affected by margin hikes,” according to the ETF Securities report.
“However, it should be noted that net speculative longs in Comex gold futures are currently at over one year highs and gold exchange traded product flows over the past month are the highest since May of last year, increasing the risk of a short-term correction,” said the firm, which manages ETFs. “Yet without a reversal of the Fed’s current extraordinary easy monetary policy or a substantial alleviation of sovereign debt risks, any correction is likely to be short-lived.”
The analysts noted that silver prices are much more volatile than gold, which has attracted many shorter term investors and traders to silver.
“In addition, gold has traditionally been a long term investment for conservative investors hedging their portfolios against worst case scenarios,” ETF Securities said. “An additional key factor that helped drive the silver price sharply downwards in May was the fact that global growth indicators were weakening and silver tends to be much more strongly affected by the business cycle than gold as approximately 50% of annual demand comes from the industrial sector (compared to around 10% for gold). With sovereign risk issues unlikely to go away any time soon, global growth still weak and the Fed hinting at the potential for some form of ‘QE3,’ gold currently would appear to have more fundamental support than silver did in May.”
ETFs Physical Swiss Gold Shares
Full disclosure: Tom Lydon’s clients own GLD.