Gold's Double Pressure: Strong Dollar & Margin Calls Loom
Gold prices continued their decline on Monday (February 2nd), moving further away from the $5,000/ounce level after the CME Group raised margin requirements for precious metals futures contracts. This move comes amidst a major sell-off that has occurred since market sentiment shifted following the nomination of Kevin Warsh as Federal Reserve Chair.
The latest spot gold price was around $4,636.97 per ounce at 9:16 a.m. London time, a sharp drop and extending the pressure from the previous session.
The market viewed Warsh's news as boosting the US dollar and reducing speculation that interest rates would be cut aggressively. From the market's perspective, a candidate who is perceived as being more assertive on inflation usually means the likelihood of tighter policy—a combination that tends to pressure gold.
The pressure was further exacerbated by technical factors: the increase in margins makes it more expensive to hold futures positions. Traders must deposit larger amounts of funds as collateral, and this often triggers forced selling (positions being reduced/closed) during times of high volatility.
The CME stated that the margin increase took effect after the close of trading on Monday. With volatility still extreme, the gold market is now vulnerable to sharp movements due to the combination of a strong dollar and an uncertain "deleveraging" process.
Source: Newsmaker.id
