Bullion St breaks into cold sweat as margin calls rise

The joy ride seems to have suddenly turned into a nightmare for bullion traders.

The prices have turned extremely choppy, magnifying their losses. Adding to the woes at this juncture, their margin requirements have gone up.

Over the last four trading sessions, the price of gold has fallen nearly Rs2,000 per 10 gram.

Gold has lost 7% since hitting an all-time high of Rs28,210 last Wednesday, while silver has shed as much as 20% from Rs64,790 over the same period. On Monday, the price of silver fell 4.51% to Rs51,825 per kg, while that of gold fell 2.36% to Rs26,225 per 10 gram.

This sharp fall is said to have wiped out a number of traders who were caught on the wrong side of the move.

“Jewellers, traders and manufacturers who over trade and highly speculate gold are the ones who may have suffered heavy losses after gold prices took a steep fall on Friday.

Individual losses could be Rs10-100 crore depending on the traded amount,” said Ghanshyam Dholakia, director at Kisna Diamond Jewellery.

An increase in margin requirement has only compounded the blow.

Margin denotes a small amount of money traders park with brokerages to take a position many times that amount.   

Margin requirements in commodity contracts could be as small as 5%, meaning that a trader could take a position worth Rs1 lakh by paying only Rs5,000 upfront.

Right now, brokerages are asking for capital over and above exchange stipulated margins in order to safeguard against large price moves, given the wild swings in prices, particularly of the precious metals.

“We have been collecting additional margins from clients for around three months. In volatile conditions, it becomes necessary to do so,” said Naveen Mathur, associate director - currencies & commodities, Angel Commodities.

“There is additional volatility, so clients are asked to deposit additional margins, which may be higher than the exchange level requirements,” said Kishore Narne, senior vice-president at Anand Rathi Financial Services.

Exchanges themselves raised the margin requirements over the weekend as volatility spiked.

The margin requirement for trading in gold has increased to 8% on the Multi Commodity Exchange, India’s largest bullion exchange. It has increased to 18.59% in the case of silver.

Volatility in the two precious metals has increased drastically over the last few weeks, which experts say is on the back of increased margin requirements globally and unwinding of positions by institutions who wish to sit on cash in times of global uncertainty.

The longer-term outlook is more bullish for gold than for silver, say experts.

“We expect gold to stabilise close to the Rs25,500 mark with a restricted downside risk and bullish outlook over the longer term. Silver is expected to be more muted in terms of returns and could also see downside of around Rs49,000,” said Mathur.