On August 11, 2011, the Chicago Mercantile Exchange (CME) raised the margins on gold futures by 22%, effectively reducing the demand for gold. CME group is the world's largest gold futures market which takes measures to reduce certain risks associated with volatility. The organization can have an effect on the price of gold by making it harder or easier to trade futures contracts. This was not an isolated decision; Shanghai Gold exchange also raised its requirements to 11% from 10% earlier this week. (If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities. Check out Trading Gold And Silver Futures Contracts.)

TUTORIAL: Macroeconomics

A margin is basically a set of funding requirement which must be met in order to receive a type of loan for trading. The trader can use this loan to purchase more of a security. These requirements are made up of the initial margin which is the amount of money that a trader needs to contribute to open a position. This was raised 22% from $6,075 to $7,425 on COMEX 100 Gold Futures. There is also the maintenance margin which is the lowest value the position can reach before the participant either needs to deposit more money or sell their position (known as a margin call).

This was raised from $4,500 to $5,500. These requirements are typically different based on the institution, and the type of security. These futures margin amounts are set by CME Clearing and changes are announced 24 hours in advance, so this was announced on August 10, 2011 and implemented August 11, 2011. The price of gold dropped 1.5% on the news.

How is This Regulation Going to Affect Traders and the Price of Gold?
In the short term, this increase in margin will reduce demand and ease the upward trend of the precious metal. The volatility should decrease as well because less traders will speculate on the price of gold. The change will not be drastic, but the intention is to increase predictability with lower swings in price.

In the long term, other factors contribute to the price of gold such as demand for industrial use, or in electronics. Also if individuals feel there might be an increase in inflation they might move to gold as a hedge to the loss in buying power of their currency.

Some traders use gold as an alternative to exposure to the stock market if they feel the markets are due for a tumble. With the new credit rating drop in the U.S., and other poor economic reports coming out such as smaller than expected rises in the retail sales numbers, gold might be used as an alternative "safe haven" for investors. In the long run, gold's price is hardly affected by these margin increases or decreases. (There is a strong correlation between gold's value and the strength of currencies trading on foreign exchanges. See How Gold Affects Currencies.

Who Sets This Margin Price?
The CME Clearing house is integrated with CME Group and acts as the counter party between sellers and buyers. They are the central futures clearing mechanism for the Chicago Mercantile Exchange. They normally act as a neutral participant and attempt to set margins so market participants such as traders have enough money contributed to cover most movements. Higher movements (known as high volatility) mean margin requirements need to be increased. This is what they have recently done.

Gold is seeing new highs in recent months, which could be due to many factors such as fear in the U.S. market, and global economic difficulties continue. These increased margins are one measure that the GME Clearing uses to decrease risks associated with high volatility and essentially lending money to traders. It does affect short term gold prices, but long term gold is based more on fundamental external factors.

Related Articles
  1. Investing Basics

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  2. Options & Futures

    Why Gold Is No Longer the Currency King

    Although a gold standard seems like a good idea, looking at its role in U.S. history reveals that it may not be the beacon of stability that it claims.
  3. Economics

    How Bitcoin Helps People Bypass Government Currency Control

    Bitcoin has helped ordinary citizens in some countries bypass government controls over free exchange conversions.
  4. Economics

    What Bitcoin Regulations Look Like Around The World

    Bitcoin is still so new that countries are struggling to make legislation catch up with technology. Some nations are more open to virtual currency than others.
  5. Investing News

    What Affirmative Action Means for Businesses

    A look at what Affirmative Action means for your business.
  6. Options & Futures

    Terrorism's Effects on Wall Street

    Terrorist activity tends to have a negative impact on the markets, but just how much? Find out how to take cover.
  7. Mutual Funds & ETFs

    Five ETFs for Contrarian Investors

    Here are five ETF ideas that can be used by the contrarian investor.
  8. Investing

    Protect Your Creations--Register Your Trademark

    Federally registering your brand name or logo offers the broadest protection against potential trademark infringement.
  9. Investing Basics

    Explaining the Liquidity Preference Theory

    According to the liquidity preference theory, investors demand interest in return for sacrificing their liquidity.
  10. Markets

    Hillary Clinton Promises Free College and Higher Wages

    With income inequality on the rise, Hillary Clinton is running on raising the minimum wage, raising middle class wages, and providing free or low-cost college education.
  1. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  2. Can the IRS audit you after a refund?

    The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According ... Read Full Answer >>
  3. How does escheatment impact a company?

    In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
  4. What happens if property is wrongfully escheated?

    If your financial accounts, such as bank, investment or savings accounts, are declared dormant and the managing financial ... Read Full Answer >>
  5. How do financial advisors help you avoid escheatment?

    Financial advisors can help you avoid the escheatment of your financial assets by regularly reviewing all of your accounts, ... Read Full Answer >>
  6. Are 401(k) accounts escheatable?

    Typically, 401(k) plans are not subject to state escheatment laws because they are covered under the Employee Retirement ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center