GOLD – Biggest two-day fall since 1983

This article was written by Alan Kohler www.businessspectator.com.au

It’s hard to get a fix, as it were, on what the sudden drop in the gold price means because at the same time as the US dollar has rallied strongly, the Chicago futures exchange operator, CME Group, has whacked up margin requirements.

The minimum cash deposit for trading gold futures has been hiked by 21 per cent to $US11,475 per 100 ounce contract. The deposit for trading silver has been lifted by 15 per cent to $US24,975.

Speculators are dumping their contracts and fleeing the market, which is perhaps not a bad thing, and the gold price has returned to its five-year trend line on the charts.

Gold and silver futures prices were already falling as part of a widespread commodity bust and because the US dollar has gone up 6 per cent this month. There are now massive realignments taking place among currencies.

Gold – everybody’s favourite alternative currency – dropped 9.3 per cent in two days last week, its biggest two-day fall since 1983, and the Australian dollar has plunged nearly 10 per cent.

Commodity futures generally are dropping like so many stones, as speculators flee rising margin requirements and, more fundamentally, rethink speculative trading strategies entirely.

Global investors appear to have gone into capital preservation mode in a way that was not evident after the 2008 crisis.

That was because in 2008 central banks responded to the Lehman Brothers and AIG collapses by flooding the world with sustained liquidity, which led to a renewed burst of speculation in commodities.

Liquidity is now evaporating again because of the Greek default threat but central banks are in no position to ante up another flood of liquidity, and governments are in an even weaker position to provide fiscal support.

So not only are recessions now more likely in the advanced economies, there’s no money to be playing with commodity futures for quick trading gains. And the capital preservation strategy of last resort is the US dollar – cash or bonds.

As an aside: the jump in the US dollar is the last thing the United States needs right now. It desperately needs to increase exports to offset the weak consumer spending at home.