February 14, 2003
Conspiracy or Coincidence?
Hike in Margin Rates Hammers Speculators
Originally developed by the Chicago Mercantile Exchange, ‘SPAN’ software is designed to quantify (correlate) price to risk in the commodities markets. Apparently, and confirming this is not easy, NYMEX plugs contract data into this program to determine if margin requirements need to be changed.
On Thursday February 5 at approximately 5:08 PM, NYMEX stated that ‘Gold futures margins will be increased to $1,500 from $1,000 for members, member firms, and hedgers, and to $2,025 from $1,350 for speculative customers.’ What these new margin requirements did – again, difficult to confirm (until today) - was force many small speculators out of the market because they could no longer maintain margin. As for the larger players – the commercials/hedgers -- margin is not that much of an issue when you have Greenspan in your corner.
Today’s Commitment of Traders report (COT) was more like a ‘Lack of Commitment from Traders’ report. To be sure, for the week ended February 11 speculative (‘non reportable’) long interest in gold dived lower by 22.45% (this ranks as sixth largest speculative gold shakeout (Longs) since 1999.)
To note: it was rumored that speculative buying supported the final price surge in gold. Furthermore, it was rumored that stop losses were piling up as more speculators continued to enter the markets (given that small speculators typically do not have excess capital to make long term bets on the price of gold the ‘speculators scramble to buy gold with stops’ story is plausible.)
Conspiracy Limitations and conclusions
Like the short selling statistics, the COT data is difficult to analyze because when the data is released (every Friday) it is already dated. Moreover, when prices are trading in an extremely volatile manner the most important data sometimes never arrives. For example, April gold peaked on Feb 5 ($390.80), while last weeks COT data was current as of Feb 4. As such, given that the positioning of market players from Feb 5-Feb 10 is never released (only the position on Feb 11), we may never know how many speculators piled into the markets and immediately got crushed by NYMEX’s margin change and/or the slumping price of gold. All we do know from the latest COT data is that speculative long interest dropped significantly while commercial interest rose significantly (speculators have sold into the latest drop in gold while the commercials have begun buying).
Nevertheless, the conspiracy angle – or that some larger market players forced NYMEX to change margin requirements so they could profit from the speculative fallout – can not be completely be ruled out. After all, the last time NYMEX raised margin rates during a strong rally was in October 1999 (NYMEX raised margin requirements twice within two weeks during the gold rush of Sept/Oct 1999). During the 1999 period a similar situation unfolded: the increase in margin requirements was a blessing for commercials and a nightmare for speculators.
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NYMEX margin changes may be the result of SPAN pumping out unbiased data. However, you can not help but wonder the mathematics behind the program and/or why margin requirements escalate only when gold is rising. Quite frankly, why doesn’t NYMEX explain the methodology it uses to determine margin rates? In sum, knowing that a hike in margin requirements usually hurts the price of gold, you cannot help but wonder why the commercials are always positioning to profit from a hike while smaller investors are not.
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