The CME has increased margin again in the gold contract and it has been reported that this increase is a key reason for a large liquidation of open interest and may be responsible for the recent sell-off. Speculative margin for the 100 oz contract is 6751.35 per contract or about 5% of the contract value.
Margin setting is an art as well as a science. It should more than cover a one day price move in the market, but it is set on a dollar basis. If volatility which is quoted in percent stays the same but the price of the commodity increases, the dollar value of a volatility will increase. Margin in dollars as a percentage of contract value will fall with rising prices. Hence, there is little choice but an action to increase margin. Nevertheless, increasing margin will make it more expensive to hold any contract. There will be reason to look for other markets to trade even if futures trading is the lowest cost alternative to access the gold market. Liquidation will occur, and it is less likely that a marginal buyer or seller will enter the market. If the cost increase and the marginal buyer is less likely to be found, the price will decrease.
If there is no increase in margin, the risk for the exchange increases. Volatility has been higher over the last year from lows in early September (for 30-day periods) although 100-day volatility has been relatively stable. Given a 17% volatility a one standard deviation move is about $1400. Margin will cover an over 4 standard deviation move. The fear is that volatility will be higher.
The concerns for business have to be balanced against the risks to the exchange. Buyers may flee but the system is more important.
Margin setting is an art as well as a science. It should more than cover a one day price move in the market, but it is set on a dollar basis. If volatility which is quoted in percent stays the same but the price of the commodity increases, the dollar value of a volatility will increase. Margin in dollars as a percentage of contract value will fall with rising prices. Hence, there is little choice but an action to increase margin. Nevertheless, increasing margin will make it more expensive to hold any contract. There will be reason to look for other markets to trade even if futures trading is the lowest cost alternative to access the gold market. Liquidation will occur, and it is less likely that a marginal buyer or seller will enter the market. If the cost increase and the marginal buyer is less likely to be found, the price will decrease.
If there is no increase in margin, the risk for the exchange increases. Volatility has been higher over the last year from lows in early September (for 30-day periods) although 100-day volatility has been relatively stable. Given a 17% volatility a one standard deviation move is about $1400. Margin will cover an over 4 standard deviation move. The fear is that volatility will be higher.
The concerns for business have to be balanced against the risks to the exchange. Buyers may flee but the system is more important.
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