We decided to send out a message to you because we believe you might be concerned about the possible severe decline in the precious metals market based on the news about an increase in the maintenance margin (according to an unofficial statements by the CME - you can read more details here: http://bit.ly/vj8GnH). Such concerns are perfectly understandable because silver's May slide was preceded by a margin hike. However, will the history repeat itself here?

Before getting into detailed discussion on the margin increase impact, let's focus on one simple fact. The margins are not going to be increased, but lowered. Here's a clarification from CME: http://www.sacbee.com/2011/11/05/4032633/cme-group-clarifies-maintenance... . The margins will be equaled but by decreasing the initial margin - not by increasing the maintenance margin. So, basically, there's nothing more to discuss as far as "margin hikes" are concerned.

However, we would like to take this opportunity to talk about a "what if" scenario. What would happen if the margins were in fact increased? Would gold plunge immediately? Not likely. The reality is that margin increases have only a temporary effect on silver and barely any effect on gold. Let's take a look at what happened after previous (last few years) margin increases.

In Dec 2009, after an unprecedented rise in gold prices during the global recession, the margin change was significant and the impact was mild in magnitude. Another sizeable margin increase in Feb 2010 after a sustained gold rally did not witness a dampening effect at all. Gold continued to rise after margins were increased. In fact, in this "exceptional" case, we observed a dip one month after the margin change. That was not attributable to the margin hike. Gold prices only paused and corrected a bit after a continued phase of unidirectional upward movement. Three months after the margin hike, the correction was over and gold was back to its normal course – up.

Two back-to-back margin increases, one in Nov 2010 and one in Jan 2011, resulted in a mild dip in prices for a week surrounding the margin change. In both cases, prices were well back on track within a month of the margin change. Clearly, margin changes for gold tend to have a minor impact on prices.

What would this mean in the current situation (if we had a margin hike for gold)? It would mean that there's no need to panic, as the impact on precious metals would not likely be major. We could see a consolidation or a small decline, but that would be in tune with gold's technical picture anyway, so that wouldn't anything that you weren't prepared for in our latest Premium Update.

Summing up, the "scary margin hike" was a misunderstanding, and the margins were in fact lowered. Even if they were increased, gold would not likely be affected to any considerable degree. Therefore, we suggest keeping our (profitable) speculative and investment long positions opened.

As always, we'll keep you updated if anything changes.

Thank you.

Sincerely,
Przemyslaw Radomski