(Bloomberg News) - Gold extended its biggest slump in 18 months on speculation financial markets are stabilizing, eroding demand from investors seeking to protect their assets, and after CME Group Inc. raised margins on futures contracts.
Gold fell as much as 3.1 percent to $1,704.25 an ounce by 1:16 p.m. in London, taking its three-day decline to 10 percent, the most since 2008. Compared with closing prices, the rout is also the biggest since then. The value of a 100-ounce futures contract traded in New York slumped $10,400 yesterday, more than the $7,425 margin requirement that day, prompting CME to increase the minimum cash deposit.
"Gold is a trade, gold is a position, gold is volatile, but gold is not safe," economist Dennis Gartman wrote today in his Suffolk, Virginia-based Gartman Letter. "The public is involved in gold, and the cab drivers of the world have bought into it. Now they are being taken out, at high cost."
The metal is in the 11th year of a bull market, the longest winning streak since at least 1920 in London, as investors seek to diversify away from equities and some currencies. Central banks are adding to reserves for the first time in a generation, joining billionaire investors including John Paulson in hoarding bullion. The Federal Reserve has taken the unprecedented step of saying it will keep borrowing costs at almost zero at least through mid-2013 to support the economy.Cash Deposit
CME raised margin requirements after gold futures surged to a record above $1,910 an ounce this week and then plunged the most since March 2008. The minimum cash deposit to borrow from brokers to trade gold futures will rise 27 percent to $9,450 per 100-ounce contract in the speculative Tier 1 category at the close of trading today, CME said. The maintenance margin will rise to $7,000 from $5,500. The Shanghai Gold Exchange said Aug. 23 it will hike margins from settlement today.
"In our opinion the margin is not nearly high enough yet," Gartman said. "Proper margining would seem to be closer to $15,000 per contract, for given the volatility that exists presently the exchange needs to protect itself and its clients from the possibility that a large speculator or two or three cannot put the exchange into jeopardy."
Speculators held a net 218,403 futures and options contracts by Aug. 16, U.S. Commodity Futures Trading Commission data show. Positions reached 253,653 contracts by Aug. 2, the most since at least 2006, the data show. The CFTC will announce the latest data tomorrow.Durable Goods
Immediate-delivery gold fell 3.8 percent yesterday after touching a record $1,913.50 on Aug. 23 and was last down 2 percent at $1,724.07, the lowest price since Aug. 12. The metal for December delivery was down 1.8 percent at $1,726.30 on the Comex in New York. Futures, which reached an all-time high of $1,917.90 on Aug. 23, tumbled 5.6 percent yesterday.
Gold fell yesterday on speculation financial markets may be stabilizing after reports on durable-goods orders and home prices beat analyst estimates. Global equities touched a one- week high today.
The 10-day historical volatility for gold futures jumped to 41 percent, the highest level since March 2009, data compiled by Bloomberg show. Silver slumped as much as 35 percent in London in about three weeks from its April 25 record of $49.79 an ounce after CME announced margin increases.ETP Holdings
Exchange-traded-product holdings of gold fell for a fourth day yesterday and the most since January, sliding 26.9 metric tons to 2,154.7 tons, data compiled by Bloomberg show. Assets reached a record 2,216.8 tons on Aug. 8.
Gold has dropped in "a correction that we have to have," said Justin Smirk, senior economist at Westpac Institutional Bank, a unit of Australia's Westpac Banking Corp. "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."
Fed Chairman Ben S. Bernanke will deliver a speech tomorrow at an annual symposium in Jackson Hole, Wyoming, amid speculation that a slowing U.S. economy and Europe's debt crisis will hobble global growth. At last year's conference, he hinted at a second round of asset purchases to stimulate the U.S. economy.
Silver for immediate delivery fell 0.8 percent to $39.4325 an ounce after yesterday sliding 5.2 percent, the most in almost three weeks. It's up 28 percent this year.
Platinum was down 0.6 percent at $1,801.50 an ounce. It yesterday slid 2.8 percent, the most since Aug. 4. Palladium slipped 0.1 percent to $747 an ounce.