The CME cuts the initial margin for gold (GLD) to $5,940 from $6,600 and silver (SLV) to $10,450...

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Wilky Comments (103)
 
Can someone please tell me, in plain language, what this means?
8 Feb, 08:21 AM Reply Like

kmi Comments (3844)
 
This pertains to trading in Futures contracts. Futures contracts are a way of making bets directly on the underlying product, which in this case is gold.

If we take the gold contract specifically, a single contract reflects "100 troy ounces" http://bit.ly/V4pMBG which, when you buy the Futures contract, you are making a commitment to purchase in its entirety on the expiration of the contract. Since the actual value of 100 troy ounces is rather significant, you can see how this may be a problem for most folks.

However, in many cases, speculators trade the contracts without any intent of actually taking delivery. Because the contract reflects such a large amount of product, it provides rather a lot of trading leverage to help one make - or lose - money rather quickly.

When you take a position on a futures contract, the CME requires you have a certain amount of cash set aside as insurance, since it is a risky, highly leveraged, trading vehicle. This cash is referred to as 'initial margin' for your initial opening of your position.

In this case, the CME margin used to be $6,600 but was reduced to $5,940.

Why this is important:

Trading brokerages will often have their own margin requirements for traders, who tend to day trade futures, but the CME's margin requirement is important for anyone who wants to hold a contract after the market 'closes'. When markets 'close' , anyone with an open position in futures has to have enough margin money to cover each contract. In this case, for gold if you had 10 contracts you needed $66,000 worth of margin cash in your account to maintain the position on the 10 contracts. The total amount of 'open' contracts held after market close in a future is called 'open interest'.

That's been changed to $5,940/contract, or $59,400 for ten. This effectively frees up $660 per contract, allowing you to invest it elsewhere, perhaps in taking a larger position.

The CME claims it adjusts margin based on volatility in the futures market, reducing margin when volatility is low and increasing margin when volatility is high. You'll find rather more sinister opinions around the internet, but it seems to work that way for the most part.

The end result of decreasing margin tends to be more trading in the product, more 'open interest', more fees collected for CME. It also seems that low volatility + reduced margin often results in the future getting bullish, which may happen here, but no one can predict market movements with perfect accuracy so be careful.
8 Feb, 03:42 PM Reply Like

ekimnaj Comments (6)
 
Yes please, what does that mean?
8 Feb, 08:33 AM Reply Like

Drew Robertson Comments (233)
 
It means that CME is not getting enough trades and is cutting margins to generate more activity from metals speculators errr traders uuummm I meant investors.
8 Feb, 08:35 AM Reply Like

flemsnopes Comments (44)
 
It should be near term bullish for gold and silver. (lower margin requirement) Of course, it could spell disaster for those who take the bait, buy on margin, and then have the margin requirements raised again just when they are most vulnerable.

8 Feb, 08:50 AM Reply Like

MMencer Comments (7)
 
Agreed. When they raised the requirements a year or so ago it drove down the price of gold and silver by requiring people have more money up front to invest. This can only help near term. Until they decide to drive the price down again.
8 Feb, 09:57 AM Reply Like

markt4909 Comments (3)
 
I agree with this although I would say that's a very slow moving train. This is something that if it does happen, would not happen next week, next month or within the next 6 months. It's bullish and not something they would do if they didn't think it was a long term play.
8 Feb, 01:56 PM Reply Like

Losing Paper While Gaining ... Comments (490)
 
Given they raised margin requirements twice in the space of a few days, facilitating the big drop you see in any longer term graph (for silver at least), I wouldn't be so sure.
11 Feb, 02:30 PM Reply Like

Japhro Comments (6)
 
They are making it easier to buy Gold and Silver futures on margin trying to get more volume in the futures mkt which has been flat for some time.
8 Feb, 08:51 AM Reply Like

Agbug Comments (865)
 
Maybe someone could, but it isn't me. Zero hedge has garnered a lively exchange on this news item since it broke. http://bit.ly/11RtAdW

I think it's just because the market is pretty quite and CME wants to get more action in the market to pull in the traders. A flat market isn't in their interests. They make money off people making bets essentially and if there's no action, there's no betting.
8 Feb, 09:06 AM Reply Like

elwaine Comments (74)
 
It could break either way. Lowering margin requirements should spur trading; but then again, tipping the hat that interest in PM trading has dropped could drive traders out of the market.
8 Feb, 09:15 AM Reply Like

Gerry W Comments (56)
 
Thank you Wilky for asking the question,and those who answered.
8 Feb, 09:17 AM Reply Like

HBWOW Comments (624)
 
Wow. Run for the exits. Audits/real or not/insurance?, too many
questions and if so good, why do they make this offer?
8 Feb, 09:48 AM Reply Like

bobdark Comments (155)
 
Although the market doesn't seem to like it this morning, I think it will be a positive in the next few weeks if equities begin a minor correction or go sideways. Treasuries are out of vogue and inflation concerns rising so gold seems like a logical hedge.
8 Feb, 09:55 AM Reply Like

labdoc Comments (4)
 
Agree that the CME is trying to get more trades. A combination of the PAGE (Pan Asian Gold Exchange) and India adding 2% to the import tax on gold may be part of the reason for the gold change. I don't know the reason behind the silver change; the CME raised the margin in May 2011 after silver hit almost $50/oz.
8 Feb, 11:04 AM Reply Like

murphyqu03 Comments (24)
 
elwaine - do you think that is why gld and slv are down? I was pretty excited and was hoping they would jump at the open this morning!
8 Feb, 11:04 AM Reply Like

Lance P. Comment (1)
 
It, also, means that the gold and future markets are not as volatile as they have been in the recent past. If volatility were to pick up in these two markets, the CME would raise margins again. A margin is an amount of money that you would have to have in your trading account for each gold or silver contract you traded. At the present time if you only have an $8,000. account, you cannot even trade 1 contract of either silver or gold. You could possibly trade a mini contract of gold or silver. Note that the margin requirement is more for silver than gold. Hence, silver is more volatile than gold.
8 Feb, 02:11 PM Reply Like

timmsk Comments (5)
 
kmi, Thank you for that excellent explanation.
10 Feb, 04:28 AM Reply Like