Market News

Spot gold fell by about 5%, after tumbling 10% earlier, extending its biggest slump in more than a decade on Friday. Silver dipped by nearly 6%, after sliding 16% earlier and posting a record intraday drop on Friday.

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 threats to the Federal Reserve’s independence. A wave of buying from Chinese speculators added froth to the rally.

“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.

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, later confirmed as the nominee, 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.

Chinese traders had reliably driven prices higher in recent weeks, but that flipped on Friday, with gold and silver falling through in the Asian session. That dynamic continued Monday, with precious metals coming under pressure as the Shanghai night market opened at 1 p.m. London time.

“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.

Total gold ETF holdings were little-changed on Friday, with investor holdings in SPDR Gold Shares ETF, the world’s largest, largely flat at 39.4 million troy ounces as of Friday, according to data compiled by Bloomberg. Investors remained net buyers of gold ETFs in January.

Gold and silver had already been bracing for extreme moves, as soaring prices and volatility strained traders’ risk models and balance sheets. Wild price swings meant banks were struggling to trade with investors, as holding positions became too risky, said Ole Hansen, head of commodity strategy for Saxo Bank AS. “Once their willingness to quote prices in size faded, liquidity deteriorated further and volatility blew out,” he said.

A record wave of purchases of call options — which give holders the right to buy at a pre-determined price — set the conditions for a squeeze, as dealers rushed to hedge their positions by buying the underlying asset as prices moved higher, contributing to further price moves. When prices fell, that process swung into reverse, with dealers selling their hedges.

Many investors had also piled into leveraged bets, further reinforcing the cascade of selling. These included margin calls on speculators who held futures contracts, as well as exchanged-traded products such as the leveraged ProShares Ultra Silver, known by its ticker AGQ, which had amped up the rally through January. On Friday AGQ had to quickly unwind billions of dollars of silver positions to reflect the new lower value of their holdings, accelerating the rout.

The rebalancing of the AGQ on Friday to reflect the new value of its assets led to an estimated $4 billion in sales of silver futures, said Hansen.

The extent to which Chinese investors buy the dips will play a key role in determining the direction of the market from here. 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.

Early signs of stabilization in gold prices had already emerged on Monday morning, supported by stronger demand from retail buyers for physical bars and coins, according to Dominik Sperzel, head of trading for major bullion refiner Heraeus Precious Metals.

The bulk of forced sales through quant fund deleveraging, leveraged ETFs and trend follower positioning may have already hit the tapes, said Daniel Ghali, senior commodity strategist at TD Securities. In the near term, retail pyschology remains key to gold prices “considering the scale of retail purchases have dwarfed those from central banks,” said Ghali.

In recent years, central banks have piled into gold, valued as a reserve asset partly because it cannot be frozen by hostile powers. Their purchases helped kick off bullion’s multiyear streak of gains, although they were eventually overtaken by retail and other institutional investors as the most important players in the market. Still, the presence of large, determined buyers reassures some investors that there is a stable source of support for prices.

“Gold’s thematic drivers remain positive,” Michael Hsueh, an analyst at Deutsche Bank AG, said in a note. Current conditions “do not appear primed for a sustained reversal in gold prices,” he said, reiterating a target price of $6,000 an ounce.

Silver, on the other hand, is a much smaller and more volatile market than gold and is sometimes dubbed the devil’s metal because of its wild swings. “Silver is always a death trap,” said Rhona O’Connell, head of market analysis at StoneX Financial Ltd.

For the white metal, the extent of the pullback took it below $71.66 an ounce — the level at which silver 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 dropped  to $ an ounce as of   in New York. Silver lost  to $ . Platinum and palladium retreated. The Bloomberg Dollar Spot Index, a gauge of the US currency, rose  after rising 0.9% in the previous session.

--With assistance from Martin Ritchie, Winnie Zhu and Brandon Harden.