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CME Raises Margins While Analysts Think Long Term

Release Date: 
Thursday, August 25, 2011

Gold prices were volatile on Wednesday as CME Group Inc. increased trading margins for gold at its Comex unit before prices ended higher for the day. The market was also affected by news of stronger U.S. economic data and expectations that the Fed will not implement another round of monetary easing. Analysts at Mitsubishi, Westpac Banking, Kingsview Financial and TEAM Financial Management discussed long term reasons to be bullish on gold.

"It is fair to say that gold should be one of the bigger beneficiaries of another round of quantitative easing; anticipation of such has been a driver of gold's strength recently given worries about financial stability and a deteriorating economic outlook," said UBS in a note. However, "gold appears to have already discounted disappointment at Jackson Hole," the bank said, referring to Fed Chair Bernanke's expected remarks. Separately, U.S. durable good orders beat expectations, fueling stock gains.

"It's not just the price move that day," said Harriet Hunnable, CME's head of metals products, on why it alters margins. "It's definitely not the price up or price down. When volatilities go up, we make a decision to put the market on notice that we will raise margins."

Gold's overall uptrend, which climbed more than 20 percent this year, is still intact, analysts said. "To be convinced you'd seen the top of the market you would have to see more signs of the issues that had lifted gold being resolved, such as the euro zone crisis, and U.S. growth coming back," said Mitsubishi analyst Matthew Turner.

"Near term, there's still a lot of reason for gold to outperform other commodities, because we don't think that problems are being resolved," said Justin Smirk, senior economist at Westpac Institutional Bank in Australia. "Long term, I'm still positive on gold. Fiscal irresponsibility is here to stay" and inflation concerns have been creeping up, said Zeman at Kingsview Financial.

This may be a buying opportunity to some investors, said James Dailey, who manages $200 million at TEAM Financial Management in Pennsylvania. "A lot of traders and investors who are long-term bullish on gold sold out hoping for a correction because of how much it went up," said Dailey. "The drivers remain intact. The toughest thing to do is stay invested during the various parabolas and sit through the corrections."

(Sources: "Cash Gold Extends Biggest Drop Since February 2010 as CME Raises Margins," Bloomberg, August 25, 2011; "Gold Extends Biggest Slump in 18 Months," Bloomberg, August 25, 2011; "PRECIOUS-Gold falls $200 from Tuesday's record high,"Reuters, August 25, 2011; "Gold has worst day since March 2008," MarketWatch, August 25, 2011)

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