Gold and Silver Post Steepest Drops in Years as Rally Cools
A selection of gold and silver bars and coins.
Photographer: Chris Ratcliffe/BloombergGold and silver saw their steepest selloff in years as investors locked in profits on concern that the recent historic rally in the precious metals had left them overvalued.
Spot gold prices slumped as much as much as 6.3%, the biggest slide since 2013, while spot silver dropped 8.7% to $47.89 an ounce after technical indicators showed earlier gains may have been overdone.
Traders also cited a stronger dollar as reducing the metals’ appeal, while the latest comments from the White House eased concerns about US trade talks with China. The shutdown of India, the second-biggest gold buyer, for the Diwali festival has also drained the market of significant liquidity.
Market trend followers and precious metals dealers “are taking profits after a very robust rally,” said Bart Melek, global head of commodity strategy at TD Securities. He added that technical market indicators for gold suggested the recent prices gains were historically unsustainable and prone to a pullback.
The plunge brought an abupt halt to a surge that had seen both metals post record highs in the past week. Gold had surged in large part because of bets on the US Federal Reserve making at least one outsized rate cut by the year-end, as well as the so-called debasement trade, in which some investors have pulled away from sovereign debt and currencies to protect themselves from runaway budget deficits.
In the silver market — which unlike gold is not just a store of wealth but a metal with industrual utility — the rally in recent weeks has if anything been even more dramatic.
A short squeeze in the London silver market last week drove prices beyond the record set in 1980, during a notorious attempt by the Hunt brothers to corner the market. Benchmark prices traded above New York futures, prompting traders to ship metal to the UK capital to ease tightness. On Tuesday, silver in vaults linked to the Shanghai Futures Exchange saw the biggest one-day outflow of silver since February, while New York stockpiles have also fallen.
Read More: Sold Out in India, Panic in London: How the Silver Market Broke
With the ongoing US government shutdown, commodity traders have also been left without one of their most valuable tools: a weekly report from the Commodity Futures Trading Commission that indicates how hedge funds and other money managers are positioned in US gold and silver futures. Without the data, speculators may be more likely to build abnormally large positions one way or another.
Option Volume on Largest Gold ETF Hits Record
Volatility and trading volumes have also surged
Source: Bloomberg
Note: Total options volume on SPDR Gold Shares, which reflects the performance of the price of gold bullion
“The absence of positioning data comes at a delicate time, with a potential build-up in speculative long exposure in both metals making both more vulnerable to correction,” said Ole Hansen, commodities strategist at Saxo Bank AS.
Gold fell 5.5% to $4,118.07 an ounce as of 12:27 p.m. in New York. Silver traded 7.0% % lower at $48.79 an ounce.
What Bloomberg Strategists say...
“As of now, ETFs’ gold holdings in absolute terms haven’t reached the peaks hit in the past, and rallies have often extended for much longer. But history shows that momentum eventually fades and in most cases, the buying morphs into selling. If delayed data eventually reveal a sturdier US economy than anticipated, a larger gold pullback may not be far off.”
—Tatiana Darie, Macro Strategist. For the full analysis, click here.
Volatility in precious metals has surged in recent days, with traders seeking to hedge against potential price drops in other parts of their portfolios, or profit from the fall. More than 2 million options contracts linked to the world’s largest gold-backed exchange traded fund were traded on both Thursday and Friday of last week, surpassing a previous record.
— With assistance from Sybilla Gross
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