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Margin Hike Threatens Gold Prices

NEW YORK ( TheStreet ) -- High gold prices need to watch their backs because margin hikes could be right around the corner.

With gold prices seeing $20-$50 swings daily, the CME could be tempted to increase the amount of money it takes to buy an 100 ounce gold futures contract -- a technique often employed to stem volatility.

Silver was the latest victim of margin hikes and is still recovering. The CME raised margins five times between April 26th and May 9th a massive 68% which eventually resulted in silver losing almost 30% of its value in less than 3 weeks. If the same fate were to befall gold, prices could tank to $1,400 an ounce.

The CME has raised margin requirements for gold twice this year, once in January and once in early August, by 11% and 22% respectively. The moves did little to stem gold's rally. A week after the margin hikes in January gold was down just 2% and a week after the August hike gold was up 1.5%.

But this time may be different for gold. As shown in the chart above from MFGlobal, gold's average true range is 40, a level not seen since the end of 2008. The last time the CME underwent a series of margin hikes for gold was between December 2009 and February 2010 when it raised requirements 50% that was when gold's average range was in the mid to high 20s.

Phil Streible, senior market strategist at MFGlobal, says "if we get these higher price swings for a few days I would anticipate a margin hike." Mihir Dange, founder of Arbitrage, agrees "it is possible ... [If] we see gold [move] more 5%-6% we could see margin requirements go up."

The Shanghai Gold Exchange beat the CME to the punch and raised margins Tuesday by 1%. The last time the exchange increased rates was August 8th, three days later the CME hiked requirements by 22%.

Not all experts think a margin hike is imminent. Anthony Neglia, president of Tower Trading, says "it's an algorithmic program it's not a bunch of guys sitting around a table." Neglia does say if gold hits $1,950 or above there could be a 15%-20% margin hike. It depends "on how we get there ... how fast and how hard then the margin requirement may kick in."
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