Ole Hansen
The main commodity index has hit a 16-year low this week as China, the strong dollar and uncertainty over December's Federal Reserve meeting continue to affect the markets. But Saxo's Ole Hansen explains why he believes crude is oversold and why he's looking for consolidation in gold.
Article / 28 September 2011 at 13:44 GMT

Gold margin increase triggers rout

Head of Commodity Strategy / Saxo Bank

The past week in metals has been one for the record books. Silver dropped by 34 percent in a matter of days, its sharpest drop in 30 years. Gold meanwhile corrected by 20 percent from its peak, which has only happened twice before during the last decade. Copper corrected by one third from the February high as hedge funds reversed their positions into shorts for the first time in more than two years.

The reasons behind the sell-off are numerous: risk adversity, a scramble to realise cash to cover loss-making positions elsewhere, economic slowdown reducing demand for industrial metals and not least another margin hike by CME, the world’s largest futures exchange. Added to this there has been market talk about heavy selling by Chinese investors. They have been focusing on the strength of their domestic economies and have been caught out by the slowdown elsewhere.

Since early August gold volatility has been stubbornly high indicating increased uncertainty about the future direction. Up until and following September 6, when a new record high at 1,921 was reached, professional investors had begun to reduce exposure despite global stock markets going into reverse. Several 100 dollar corrections during the last month added to the unease among investors who had been viewing gold as the ultimate safe haven asset. 

The rout happened last Friday as rumours about an imminent CME margin hike on the gold futures contract pushed it below 1,700, only to accelerate Monday when Far Eastern investors could react to the new situation. Silver extended the sell-off that began in early May and gold reached but did not breach the line in the sand being represented by its 200-day moving average.

In our article “Heads up! Gold futures margin could be raised again” from 31 August we argued that the ongoing volatility and daily price swings probably warranted another hike to between 8,200 and 9,000 dollars per contract. On Friday the margin for holding a gold futures contract was raised to 8,500 which means an investor at the current gold price needs to pay 5.2 percent of the contract value to maintain a position. 

Such a margin is historically relatively high and unless we see a further escalation this should probably be enough for now. Technically gold held and bounced strongly of its 200-day moving average, currently at 1,530, and this has returned some of the confidence that was lost during the rout. The arguments for holding gold have if anything strengthened during August so once this nervousness subsides gold could shine once again.

What are the risks from here? It took 18 months to reclaim a new high during the previous two major corrections in 2006 and 2008; investor redemptions from exchange traded funds (ETF) have so far been very limited and as such carry the risk of further selling should that type of investor decide to scale back as well. Lastly and probably most importantly we need to see volatility reduced as excessive volatility poses the biggest risk to gold’s safe haven appeal.



The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Show latest activity
Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail