Themarket enables investors to their positions using futures. In the futures exchange, investors do not have to post the total value of the contract as collateral in their accounts. Instead, a margin is required, which is only a small part of the value of the contract.
There are two types of margins in the gold futures markets such as. The initial margin is the minimum amount required to enter into a new futures contract, while the maintenance margin is the lowest amount an account can reach before needing to be replenished. In other words, before a futures position can be opened, the balance available in the futures trader’s margin account must be enough to meet the initial margin requirement. And if the balance in the futures trader’s margin account falls below the maintenance margin level (the maintenance margin level is usually slightly below the initial margin), they will receive a margin call to top up their margin account so as to meet the initial margin requirement.
Margins for Gold
The margin requirements for gold are set by the exchanges and they may be changed periodically (you'll find details in our report on) as the price of gold changes to ensure adequate collateral coverage. For example, in February 26, 2016, the raised margins on gold futures. Thus, as of April 10, the initial margin in the main 100-ounce gold contracts on the Comex division of the New York Mercantile Exchange is $4,950, while the maintenance margin for existing accounts is $4,500.
Let’s assume that an investor has $5,000 in their trading account. They purchase gold futures at $1,200 per ounce. Each gold futures contract represents 100 ounces and requires an initial margin of $4,950 and a maintenance margin of $4,500. Since the investor’s account is $5,000, which is slightly more than the initial margin requirement, they can therefore open a position in one gold futures contract. One day later, the price of gold declines to $1,196 per ounce. Thus, our investor suffers a loss of $400 ($4 x 100 ounces) and thus their account balance drops to $4,600. Although the balance is now lower than the initial margin requirement, they do not get the margin call as the balance is still above the maintenance level of $4,500. Unfortunately, on the next day, the price of gold drops further to $1,190, leading to an additional $600 loss. With only $4,000 left in the trading account, which is below the maintenance level of $4,500, the investor receives a margin call from their broker asking to replenish the account back to the initial level of $,4950 in order to maintain the position.
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