Will CME Break Gold's Back?
This morning I heard the experts warning to be careful buying gold right now because the CME is expected to move in once again and raise margin requirements on 100oz. Gold contracts.The last move raised the required deposit from $6,075 to $7,425.This, reportedly, prompted a knee-jerk reaction that drove gold about $50 off its highs.
My perception at the time was that the pull-back in the gold price was more the result of profit taking than a reaction to the CME action.I just don't see how raising the deposit requirements by $1350 against $180,000 worth of gold is going to be that discouraging to investors in futures contracts.
In support of the warning, we were hearkened back to recent CME actions regarding silver contracts.The statement was made, "it took seven increases to break the back of silver."As I recall the silver market at the time, silver was making strong moves off of January lows below $27 an ounce.By April, over the Easter holiday, Asian buying had driven the silver price near $50 an ounce, setting off a barrage of increases by CME Group to deposit requirements.
The silver price reacted and was driven back down to the $34 range, albeit for a very brief period of time.This is what they refer to as breaking the back of silver.It was driven all the way back to just a 100% increase over 12 months.If you blinked, you missed a great buying opportunity as silver has rebounded strongly to trade above $40 an ounce within just weeks of the CME induced low.It hardly appears silver has a broken back.To me this shows remarkable resilience at a time when market forces are working against the metal.
As we were reminded that it took seven increases to break the back of silver, the question by another morning talking head was raised, how can you call gold a safe haven when it is so vulnerable to CME moves such as we saw last week?(I paraphrase)I could hardly believe my ears.Here we sit at record highs, again, just days after the first CME hike and you're trying to tell me gold is vulnerable.
My perspective is, physical Gold just flat ignored the CME move which primarily affects paper gold prices.A more logical question to ask would have been, will gold ignore another CME move and once again move to record highs?I really doubt, when China buys physical gold by the hundreds of tonnes, that they are concerned about anything the CME may or may not do to influence the price of paper gold.
The CME did not break the back of Silver and Gold totally ignored it altogether.That, by itself, could be interpreted as a buy signal.That said, let me leave you with one question to ponder.Why are treasuries considered safe-haven when all you have to do to buy them is print more money?