Gold and silver saw their steepest selloff in years as investors locked in profits on concern that the recent historic rally in the precious metals left them overvalued.
Spot gold prices slumped as much as 6.3%, the biggest decline in more than a dozen years, while spot silver dropped as much as 8.7% after technical indicators showed earlier gains may have been overdone.
“A drop of more than 5% is rare,” Alexander Stahel, a resources investor in Switzerland, said of bullion’s plunge. “In theory, it would be once in hundreds of thousands of trading days.”
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The market plunge brought an abrupt halt to a surge that had seen both gold and silver post record highs in the past week. Gold had soared in large part because of bets on the US Federal Reserve making at least one outsized rate cut by 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.
Gold’s pullback emanates from a combination of quite powerful technical indicators, according to Frank Monkam, head of macro trading at Buffalo Bayou Commodities. He sees strong support at $4,000-$4,050 and expects prices to climb again after returning from overbought positions. “A positioning cleanup should set us up for the next leg higher, led by ETFs” and emerging markets central banks flows, he said.
The record-breaking bullion rally since September had been mostly driven by followers of market trends, and such trading “naturally has the potential to go the other way as soon as we get a couple of days of prices coming off,” said Helen Amos, a commodity analyst at BMO Capital Markets.
A stronger dollar is also reducing the appeal of precious metals. Gold fell 5.3% to $4,125.22 an ounce as of 4:59 p.m. in New York while silver traded 7.1% lower at $48.71 an ounce.
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The shutdown of India, the second-biggest gold buyer, for the Diwali festival has also drained the market of significant liquidity. In the silver market — which unlike gold is not just a store of wealth, but a metal with industrial utility — the gains in recent weeks have if anything been even more dramatic.
A historic 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.
Bullion’s ascent to a fresh record last week was partly driven by concerns over credit quality in the US economy. That helped holdings of physically backed gold exchange-traded funds recording a massive fund inflow of $8 billion last week, the biggest weekly inflow in data going back to 2018, according to data from the World Gold Council.
“When you’ve got that much money quickly coming into the space, it’s only natural to expect some of that money to leave as well when people have made a quick return,” Amos said.
Source: Bloomberg