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Thu 25 Aug 2011 11:49 AM

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Gold loses more shine after trading margin hike

Spot gold dropped by more than 4% on Wednesday, its biggest drop since Dec 2008

Gold loses more shine after trading margin hike
Data suggesting the US economy was facing a slowdown instead of a recession also took the shine off safer assets like gold (Getty Images)

Gold fell more than 1 percent on Thursday, extending the
previous session's losses, after the CME Group raised trading margins by the
most in over two and a half years to curb volatility in bullion that had surged
to dizzying heights.

Spot gold dropped by more than 4 percent on Wednesday, its
biggest drop since December 2008, as investors liquidated positions after the
precious metal surged nearly 35 percent this year to a record high above $1,911
on Tuesday.

CME increased margin requirements on its gold futures contract
by 27 percent, the second hike in a month, following similar moves by the
Shanghai Gold Exchange and Hong Kong Mercantile Exchange earlier this month.

Data suggesting the US economy was facing a slowdown instead
of a recession also took the shine off safer assets like gold.

"A lot of hot money has entered the complex and the
rally was done too much in too short a time," said David Thurtell, an
analyst at Citigroup.

"Last 24 hours there was definitely profit-taking. With
the margin hike, if speculators don't have the money to pull out as extra
margin they'll just cut their positions. That contributed to the
liquidation."

Spot gold slipped as much as 1.3 percent to $1,728.59 an
ounce, before recovering some ground to trade at $1,739.80 by 2:17 a.m. EDT. On
Wednesday, bullion dropped 4.3 percent, its biggest daily drop since December
1, 2008.

US gold fell 0.8 percent to $1,742.90, after dropping 5.6
percent on Wednesday, the steepest daily drop since March 2008.

Helping fuel Wednesday's sell-off was data showing new
orders for long-lasting US manufactured goods rose more than expected in July,
offering hopes that the ailing economy could dodge another recession and
boosting risk appetite across markets.

Before this week's drop, bullion had surged more than $400
since July and scored consecutive record highs as a struggling US economy and
crippling debt crisis in Europe boosted gold's safe-haven appeal.

Spot gold has lost more than 8 percent from its all-time
high. The price surged nearly 10 percent in the six-day climb before the
decline.

"People always refer to gold as safe haven. When we
introduce volatility to the equation, it doesn't seem so safe anymore,"
said a Singapore-based trader, but added that gold's luster looks intact.

"Many leveraged longs are going to leave it alone for a
while. And when prices come down like this, it might be a buying opportunity
for real money account like central banks."

Technical charts suggest that a medium-term uptrend for gold
is intact even after the sharp drop over the past two sessions, with a rebound
likely to push it to $1,784, said Reuters market analyst Wang Tao.

Holdings in the SPDR Gold Trust dropped 2.2 percent on the
day to 1,232.314 tonnes by August 24, its lowest in more than a month and down
6 percent from a one-year high of 1,309.922 tonnes hit on August 8.

ANZ has raised its forecast for gold prices, expecting
prices to peak at $2,200 in the second quarter of 2012, from a previous
forecast of $1,800.

"The substantial revision has been propped up by an
unusual lack of support for the US dollar under the current uncertain financial
market conditions - effectively channeling stronger than normal safe-haven
flows to gold," said ANZ analysts in a research note.

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