To better understand how the spot price of gold gets 'discovered,' critical to understand some of the key inputs in one of the most significant dictators of gold bullion prices, the CME Group's COMEX in New York.
Recently some of the largest COMEX gold traders who headed JP Morgan’s gold derivatives trading desk have been charged with violating Racketeering Influenced and Corrupt Organizations Laws.
For about six years now, the CME Group (COMEX owner and operator) openly invites foreign central banks to trade high volume futures contracts at a discount. The same gold futures contracts which are crucial to gold bullion price discovery markets and gold price mechanics.
There remain many market participants who want to keep trading COMEX gold futures contracts (GC) regardless of these facts due to the sheer size of this derivative market (liquidity trumps true supply-demand factors, at least for now).
The fact that COMEX is highly leveraged to a small fractionally reserved pile of underlying gold bullion matters, not to those who have massive hedging or even greed-driven motives (gold price volatility up or down, can produce large profits using leverage and often alleged inside information).
Gold Margin Requirements | 2005 - 2019 Comex Gold Margin Leverage
GREEN ⬆ COMEX Gold Margin Requirement Increase | RED ⬇ COMEX Gold Margin Requirement Decrease
Here we cover what gold margin requirements are.
What are they for, and why do they change over time?
What was the highest Comex gold margin requirement ever recorded?
How might have sharply increasing GC margin requirements caused the gold spot price to collapse in August 2011?
Gold futures ticker, Gold futures symbol - GC
Gold futures contract size - 100 oz*
[*in derivative gold, rarely gold bullion ever gets delivered on contracts, almost all are settled in fiat USD]
Gold futures twitter symbol - #GC_F
In the gold futures market, participants can leverage their derivative gold positions using futures contracts.
In the futures exchange, investors and entities do not have to post the total value of the gold futures contract as collateral in their accounts.
Instead, a gold margin requirement is required, which is only a small part of the value of the contract. Here we examine the gold margin requirement history from 2005 to 2019 for gold futures (SI) contracts on the COMEX.
For example, a non-member gold futures trader on the COMEX has to currently put up $4,950 fiat US dollars to control an SI contract representing 100 derivative gold ounces, or currently $150,000 worth of gold bullion value.
In other words, almost 30X leverage is possible at the moment for COMEX gold futures non-member traders.
Often if one investigates short term spot gold price action. You will come across forecasters and gold price predictors who may mention any recent news of the COMEX either raising or lowering gold margin requirements.
Typically and often argued, is the idea that each time the COMEX raises gold margins, it is bearish for gold prices for most of the leveraged longs are speculative investors (betting the price for gold will rise).
Meanwhile, the often alleged naked gold shorts or commercial bank derivative desks with deeper pockets can flush out the long betters and get the gold futures price to fall on the COMEX as a typical result.
The CME Group runs the COMEX. And they essentially define gold margins as the following.
Gold Margin Requirements - (n) fiat US dollar deposits held at CME Clearing to ensure that clearing members can meet their obligations to their customers and to CME Clearing.
In gold futures (SI) trading, two different kinds of margin requirement levels get made for two different types of market participants.
Initial margin requirements are the up-front payment — a percentage of the trade price, made before a market transaction when purchasing on that margin.
After the initial margin gets met, a market participant is required to keep up the maintenance margin — the amount of equity necessary to retain an open position.
Speculative ("Spec") or non-member initial margin requirements for all products get set at 110% of the maintenance margin requirement for a given product.
Hedger or member initial margin requirements for all products get set at 100% of the maintenance margin requirement for a given product.
The idea that some entity is a hedger makes little to no sense at all, as no one knows anyone else's books in real-time so to claim an entity a hedger is a misnomer.
The record high in gold margin requirements for spec non-member gold futures traders in percentage terms was in late 2008 gold price action. During the global financial crisis when non-members wanted to trade COMEX gold futures on margin it required that they put up over 10% of the contract's then roughly $90,000 fiat US dollar gold derivative representative value.
August 2011 gold price highs were then touching record nominal price highs in fiat US dollars. This had COMEX gold futures contract traders having to pony up over $13,000 per 100 oz GC contract. Reaching almost 8% of a margin funding required, or over 14X leverage before the late September 2011 gold price plunge (in that link, you can scroll down and hear why a highly successful hedge fund manager would never hold a long term gold position ni the COMEX).
Recent price history shows, COMEX gold margin requirements are important to watch during a financial crisis and especially around exponential gold nominal price highs.
COMEX gold margins can often be a leading indicator when a major gold derivative price move may be coming next.
Read about how gold price discovery works today, via outsized derivatives trading on exchanges such as the COMEX.
COMEX Gold Margin & Gold ETFs in Perspective ( moment 10:38 is key )
The fact that the gold derivative market is highly leveraged today, makes most conservative gold bullion investment allocation safer in gold bullion you own outright.
To learn more about gold bullion buying and how to intelligently sell gold bullion, be sure to pick up our free SD Bullion Guide.
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