Gold prices take biggest plunge in 30 years; CME hikes gold margin requirements

On a fateful day in August 2011, gold prices collapsed more than $100 in a single day of trading.

Gold bullion prices collapsed more than $100 an ounce yesterday. According to Reuters, that’s the largest single-day drop in nominal dollars since 1980, and the largest one-day percentage drop (at more than 4 percent) since 2008.

Markets are jumpy right now. Investors are positioning themselves for an announcement from Fed Chairman Ben Bernanke on Friday morning. Bernanke will speak from his annual pow-wow with several others central bankers in Jackson Hole, Wyoming. While many were anticipating Bernanke would announce more economic stimulus (just as he did last year after the Jackson Hole meeting), that notion seems to have gained a lot less traction in recent days. That’s lent some strength to an otherwise ailing dollar and pushed investors into riskier trades – particularly equities.

One trader told Bloomberg that he started getting really nervous about gold prices when he heard that the total value of the SPDR Gold Trust (NYSE:GLD) had surpassed the value of the SPDR S&P 500 ETF (NYSE:SPY). SPY’s been the world’s largest ETF since 1993. Seeing it kicked to the No. 2 slot in favor of gold was a sign that perhaps stocks were underbought.

When it rains, it pours

The CME Group doused even more water on the price of gold after it announced late last night that it was raising gold margin requirements 27 percent after trading on Aug. 24. The move follows a 22 percent margin requirements hike on Aug. 11. If gold prices bounce back after today’s collapse, I wouldn’t rule out even higher margin requirements.

When the CME started raising margin requirements on silver this spring, they didn’t stop until the market had given up a month’s worth of gains. During one nine-day period late in April, the CME raised silver margin requirements by 84 percent.

One of the big drivers for equities yesterday, and a downward force on gold prices were better than expected numbers on durable goods orders. Orders for things like airplanes, automobiles and business equipment rose 4 percent last month. That was more than twice as much as expected. And that bit of good news overshadowed the bad: namely, that business spending fell 1.5 percent last month. That’s the biggest decline in corporate outflows since January, and it’s an indication that businesses started tightening the reins on their pocketbooks over fears of a double-dip recession.

The arguments for investing in gold (reference my post “Why invest in gold“) have gotten an added boost thanks to inflation not just in the U.S. but around the world. The Swiss Central Bank has even considered pegging its currency to the Euro so its export market can remain competitive. That leaves few safe havens for investors and it’s even pushed up the value of U.S. treasuries in the wake of a downgrade for U.S. debt. Investors invest not just to make money, but to protect the capital they’ve already accumulated. With the dollar expected to remain weak through at least 2013 (when the Fed may begin raising interest rates from historic lows), I don’t think we’ve seen the last of the gold story. This is just a temporary bump in the road.

How to short gold with ETFs

ETFs make it easy to bet against the yellow metal. Investors can short the flagship SPDR Gold Trust (NYSE:GLD) (which would have been good for a 3.3 percent gain yesterday), or go long on the PowerShares DB Gold Double Short ETN (NYSE:DZZ), which spiked 10.3 percent yesterday. GLD holds physical gold deposits in a London bank, while DZZ attempts to return twice the inverse of the Deutsche Bank Liquid Commodity Index. If the index goes down, DZZ should go up twice as much as the index’s decline.



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