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Gold Plunge Deepens as Traders Unwind ‘Crowded’ Bets on Rally - BLOOMBERG
BY Yihui Xie and Preeti Soni
(Bloomberg) -- Gold extended losses, after its biggest plunge in more than a decade on Friday, while silver’s year-to-date gains were wiped out as a record-breaking precious-metals rally unwound at breakneck speed.
Spot gold fell as much as 10% on Monday and is now down almost a fifth from an all-time high reached in the last-but-one session. Silver slumped as much as 16%, following on from an intraday loss on Friday that was the steepest on record.
“The bottom line is that the trade was way too crowded,” 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.
Precious metals had risen to record 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.
“Most buyers who were already sitting on profits had one foot out the door, ready to exit at any moment,” said Jia Zheng, head of trading at Shanghai Soochow Jiuying Investment Management Co. The selloff has been driven largely by bullion-based exchange-traded funds, as well as leveraged derivatives, he said.
The extent to which Chinese investors buy the dips will play a key role in determining the direction of the market from here. While the Shanghai benchmark price extended losses 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 Chinese 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 holidays.
The trigger for Friday’s dramatic selloff was the news that US President Donald Trump will 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 bracing for 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 were forced to adjust to rising prices by buying more. “This is a wholesale exit,” said Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S. “The underlying fundamental support will only reassert itself once the selling is done and investors get a chance to look ahead again,” he said.
That fundamental support, however, hasn’t changed in the last few days and “gold’s thematic drivers remain positive,” Michael Hsueh, an analyst at Deutsche Bank AG, said in a note. “The conditions do not appear primed for a sustained reversal in gold prices,” he said, reiterating a target price of $6,000 an ounce.
For silver, the extent of the pullback took it below $71.66 an ounce — the level at which the white metal ended last year. Waves of hot money in China have contributed to domestic supply tightness, but that may subside as the rout damps 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 tumbled 7.3% to $4,536.46 an ounce as of 3:21 p.m. Singapore time. Silver lost 15% to $72.68. 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.
--With assistance from Martin Ritchie and Winnie Zhu.
