Gold fell, following its biggest plunge in more than a decade, and silver extended a dramatic reversal of a record-breaking rally that ran too far, too fast.
Spot gold fell as much as 6.3%, while silver plunged as much as 11.9% in Asian trading hours on Monday. The white metal swung sharply, at one point rising more than 3% before resuming a sharp decline. Its intraday loss in the previous session was the steepest on record.
“This isn't over,” said Robert Gottlieb, a former precious metals trader at JPMorgan Chase & Co. and now an independent market commentator, adding that a reluctance to take further risks would constrain market liquidity. “We've got to see if it's going to find support. The bottom line is that the trade was way too crowded.”
Photo Credit: Bloomberg
Precious metals had risen to all-time highs that shocked even seasoned traders. An already-scorching rally accelerated sharply in January, as investors piled into gold and silver on renewed concerns about geopolitical turmoil, currency debasement and the Federal Reserve's independence. A wave of buying from Chinese speculators added froth to the rally.
The extent to which Chinese investors buy the dips will play a key role in determining the direction of the market after Friday's retreat. While the Shanghai benchmark price extended a fall after the market opened, it was still trading at a premium over the international price. Over the weekend, buyers flocked to the country's biggest bullion marketplace in Shenzhen to stock up on gold jewelry and bars ahead of the Lunar New Year.
“The combination of heightened volatility and the proximity of the Lunar New Year will prompt traders to trim positions and reduce risk,” said Zijie Wu, an analyst at Jinrui Futures Co. At the same time — particularly in peak buying season — the pullback in prices is likely to support retail demand in China, he said.
China's domestic markets will be closed for just over a week from Feb. 16 for the Lunar New Year holidays.
The trigger for Friday's dramatic selloff was the news that US President Donald Trump would nominate Kevin Warsh to lead the Fed, which sent the dollar higher and undercut sentiment among investors who had bet on Trump's willingness to let the currency weaken. Traders regard Warsh as the toughest inflation fighter among the final candidates, raising expectations of tighter monetary policy that would underpin the dollar and weaken greenback-priced bullion.
But precious metals had already been facing extreme moves, as soaring prices and volatility strained traders' risk models and balance sheets. A record wave of purchases of call options — contracts which give holders the right to buy at a pre-determined price — were “mechanically reinforcing upward price momentum,” Goldman Sachs Group Inc. said in a note, as the sellers of the options hedged their exposure to rising prices by buying more.
For silver, waves of hot money in China have contributed to domestic supply tightness, but that may reduce as the rout dampens investment demand, Wang Yanqing, an analyst at China Futures Co., said in a note. “Once the consensus expectation of a one-way rally is broken, shorts' willingness to make delivery will increase, helping to ease the shortage,” he said.
Gold fell 4.6% to $4,671.53 an ounce as of 12:15 p.m. Singapore time. Silver declined 7.4% to $78.86. Platinum and palladium also retreated. The Bloomberg Dollar Spot Index, a gauge of the US currency, was up 0.1% after rising 0.9% in the previous session.
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