Has Gold Peaked ?

Has Gold Peaked?
Posted on 12 August 2011 by by: Matt Grossman
After a three-day rally in gold that vaulted the price over $1,800, yesterday the yellow metal had its biggest sell-off of the past seven weeks. There are a number of reasons for this drop but a major catalyst was the Chicago Mercantile Exchange’s decision to hike its margin requirement on Wednesday night.
The Chicago Mercantile Exchange (CME) is the world’s leading derivatives market place. On the CME, precious metal futures, like gold and silver, are heavily traded by traders and institutional investors from all around the world.
To trade on the CME, traders and institutions must follow a certain set of rules and requirements. One of these requirements is how much margin is needed to purchase a certain amount of a particular commodity. The CME can alter the margin requirements without warning and at anytime. Increasing margin requirements means that those traders or institutions that are long a particular commodity must increase the amount of cash they have invested in their position, if they wish to continue to hold it. Otherwise they are forced to sell some or all of their position to meet the new margin requirements.
On Wednesday night the CME raised the margin on gold futures by 22%. This means that the minimum amount of cash that speculators must keep on deposit for an initial account increased to $7,425 on a 100-ounce contract from $6,075.
Those traders/investors who didn’t have enough cash to cover the additional margin liquidated some or all of their positions, causing a drop in the price of the tallow metal. Also, those buyers who were considering entering into the upward momentum yesterday morning probably stayed away from doing so as they expected gold prices to fall.
Another reason why gold sold off yesterday was that traders/investors are concerned that gold has come too far too fast – in just the past six weeks, gold has rallied more than 20%.
In addition, there is speculation that large hedge funds will be forced to raise money by selling gold. Well known portfolio manager John Paulson’s fund is reportedly down more than 31% for the year. However, the fund’s largest winner has been a large gold position and many are wondering if a huge panic sell-off will occur if/when Paulson decides to liquidate.
However, not all investors are ready to call a top in gold. Gold bulls argue that central banks from around the world are still buying the yellow metal, most countries are actively trying to devalue their currency, and there is still a chance of another round of quantitative easing in the US. Not to mention, the European sovereign debt crisis has many people thinking that the days of the eurozone economy are numbered.
As for me, I have been bullish on gold for years and continue to be. I’m not saying that it can’t have a retracement in the short term but I don’t think it’s seen its all time highs. Between weakening fiat currencies and continued high levels of fear and uncertainty, I believe gold will continue to move higher and be the asset investors turn to for protection and safety.
What do you think? Do you think gold has hit a top? Do you think this is just a temporary retracement? Where do you think gold will be trading by the end of 2011?
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Has Gold Peaked ?