This is something people should be aware of when considering whether or not to be invested in gold - at least, 'paper gold'. Even at $1,400, the initial margin requirement for Comex Gold futures is just a bit over 4% ($5,940 per 100 ounces). The maintenance requirement is less than 4% ($5,400 per 100 ounces). That means that someone can put up $40,000 and 'own' $1 million worth of gold. With margins that low, it doesn't take as much money to have as much impact on the market prices. And that matters even more with something like gold where: (1) so much of the buying and selling is for investment purposes rather than for use - acquisition and production hedging; and (2) there aren't important underlying fundamentals that would be fairly effective in imposing upper and lower bounds on prices. And quite important here, it is the futures markets (e.g. with Gold Comex) that drive gold prices, not the physical buying and selling of it - not some technical spot market. The former is where all the volume is.
If you're fully margined with regard to your Gold Comex investment (e.g. you only have about $50,000 of your own money in your account but you control $1 million worth of gold contracts), then a price decline of just 5% completely wipes you out. You haven't lost 5% of your money, you've lost all of it. The lower the margins, the more small price movements can force margin selling. That's almost surely part of what we're seeing today. People are being forced to sell their gold positions whether they want to or not because, with the price declines from last week, they don't have enough money in their accounts to cover their positions and they can't raise enough money (or don't want to) quick enough to cover those positions. Significant price drops can perpetuate themselves.
I think Gold Comex, e.g., needs higher margin requirements - maybe 10 or 15%. But that would mean a lot less money in gold, less contracts traded, and less money made by the CME, which sets the margin requirements. The low margins we have now contribute to the volatility of gold prices.
