Following the largest single-day plunge in gold and silver futures prices in decades, CME Group Inc (CME.US) has announced an increase in trading margins for related contracts on its COMEX exchange.
In a statement released on Friday, CME Group stated that for non-high-risk accounts, the margin requirement for gold futures will be raised from the current 6% to 8% of the contract's underlying value; for high-risk accounts, the margin will increase from 6.6% to 8.8%.
The statement also indicated that the margin for silver futures for non-high-risk accounts will be raised from 11% to 15%, while for high-risk accounts, it will increase from 12.1% to 16.5%.
Furthermore, margin requirements for platinum and palladium futures were also increased simultaneously.
These margin adjustments will officially take effect after the market close next Monday; CME Group stated that this move is a result of a routine assessment of market volatility, aimed at ensuring that margins adequately cover trading risks.
The precious metals market experienced one of its most severe single-day corrections in decades on Friday.
After prices for gold and silver surged to record highs earlier this month, a wave of large-scale profit-taking occurred in the market.
The international gold price fell by over 11% in a single day, while the COMEX silver price plummeted by more than 31%.
Analyzing the reasons for this sharp decline in precious metals prices, Ponmudi R, CEO of Enrich Money, stated: "The primary trigger was US President Trump's nomination of Kevin Warsh for the next Federal Reserve Chair.
Warsh is known for his hawkish inflation stance and emphasis on Federal Reserve independence; his nomination prompted the market to rapidly reassess macroeconomic conditions: the US dollar strengthened, real yields rose, and leveraged positions in gold and silver, which had been used as excessive hedging tools, were quickly unwound.
This led to a violent sell-off, wiping out tens of billions of dollars in market value and flushing out weaker holders in a classic shift from frenzy to exhaustion.
However, this does not signal the beginning of a structural bear market reversal."
An increase in margin requirements means that investors trading gold, silver, platinum, and palladium futures will need to deposit more collateral as performance guarantees.
Although CME Group routinely raises margins when futures contract prices experience sharp rallies, steep declines, or high volatility, the adjustment announced this Friday may further force small and medium-sized investors with insufficient capital, who cannot meet the increased margin calls, to exit the market.
Anuj Gupta, a SEBI-registered commodities expert, said: "After raising margins for copper trading, CME has now increased margin requirements for gold and silver. This move is expected to continue putting pressure on precious metals prices."
It is noteworthy that earlier this week, CME Group had just raised margin requirements for silver, platinum, and palladium futures due to the significant price increases in precious metals.
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