- Gold rebounded above $5,000 an ounce, rising 2.9% after a historic collapse
- Precious metals surged last month due to speculation and geopolitical concerns
- Chinese gold ETFs saw a record $1 billion outflow, shaking investor confidence
Gold rose for a second day, rebounding above $5,000 an ounce as dip buyers snapped up precious metals following a historic collapse from record highs.
Bullion climbed as much as 2.9% on Wednesday, after gaining more than 6% in the previous session. The yellow metal is more than $500 below the all-time high hit on Jan. 29, but remains up around 17% for the year. Silver also advanced.
Photo Credit: Bloomberg
“Forced sales have likely run their course in precious metals,” Daniel Ghali, a senior commodity strategist at TD Securities, said in a note. “The intense volatility over the last week could certainly keep retail participants on the sidelines, removing an increasingly important cohort of buyers.”
Precious metals soared last month in a rally underpinned by speculative momentum, geopolitical upheaval and concerns about the Federal Reserve's independence. However, market watchers warned that the advances had been too large and too swift. The surge came to a sudden halt at the end of last week, with silver seeing its biggest daily drop on record and gold plunging the most since 2013.
Chinese funds and Western retail investors had built up large positions in precious metals, and further fuel was added by investors piling into leveraged exchange-traded products and a wave of call-options buying. A sudden collapse during Asian trading hours on Friday continued into the early part of this week.
“As prices fell, dealer hedging flipped from buying into strength to selling into weakness, investor stop‑outs were triggered, and losses cascaded through the system,” analysts at Goldman Sachs Group Inc including Lina Thomas wrote on Tuesday.
Mainland China's four largest gold-backed exchange-traded funds saw combined outflows of nearly $1 billion on Tuesday, according to data compiled by Bloomberg — the biggest ever one-day decline and a sign of how investor confidence has been rattled. Last week, the same ETFs were notching record inflows.
Still, investors and analysts believe the fundamentals that drove bullion to record highs remain intact. Fidelity Fund, which sold a chunk of gold holdings days before the plunge, is watching for an opportunity to buy again, portfolio manager George Efstathopoulos told Bloomberg News.
Many banks have backed gold to recover, with Deutsche Bank AG saying on Monday that it was standing by its forecast for bullion to rally to $6,000 an ounce. Goldman Sachs said in a note that it sees “significant upside risk” to its year-end forecast of $5,400.
Volatility in precious metals will remain elevated, according to Bank of America Corp. Gold has a stronger, longer-term investment thesis than silver, said Niklas Westermark, head of EMEA commodities trading at BofA. While inflated prices and market turmoil may affect position sizing, it won't dampen overall investor interest, he said.
Gold has also drawn support from geopolitical tensions, as strains between the America and Iran intensified following the US Navy's downing of an Iranian drone. President Donald Trump, however, reiterated that diplomatic talks between the two countries are ongoing.
Bullion was 2.2% higher $5,053.82 an ounce as of 11:39 a.m. in London. Silver advanced 5.8% to $90.11. Platinum and palladium also gained. The Bloomberg Dollar Spot Index, a gauge of the US currency, rose 0.2%.
Read More: Gold, Silver Bounce Back: Key Factors Behind The Rally And What Experts Predict
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