Gold and silver suffered their biggest slide in years, in a whipsawing reversal of a scorching rally that’s lifted prices to all-time highs.
Gold dropped as much as 8% to crash through $5,000 an ounce, while silver slumped below $100 as the sell-off swept through the broader metals markets. Copper dropped almost 4% in London, after surging above $14,000 a ton for the first time on Thursday, in its biggest intraday jump since 2008.
A wave of investor demand into precious metals over the past year has taken out record after record, shocked seasoned traders and driven exceptional price volatility. That only accelerated in January, as investors piled into the time-honoured havens amid concerns about currency debasement and the Federal Reserve’s independence, trade wars and geopolitical tensions.
While gold and silver are still set for hefty monthly gains, yesterday’s sell-off is the first major shock to the rally since a similar slump in October. It was triggered by the dollar rebounding after a report the Trump administration was preparing to nominate Kevin Warsh for Federal Reserve chair, now confirmed.
The greenback’s rally undercut sentiment among investors who had been piling into metals after the president signalled a willingness to let the currency weaken.
Gold’s move “validates the cautionary tale of fast-up, fast-down”, said Christopher Wong, a strategist at Oversea-Chinese Banking Corp. While reports of Warsh’s nomination were a trigger, a correction was overdue, he said. “It’s like one of those excuses markets are waiting for to unwind those parabolic moves.”
Soaring prices and volatility had already strained traders’ risk models and balance sheets, leaving the market primed for extreme moves by hampering their ability to trade. A record wave of purchases of call options, contracts which give holders the right to buy at a pre-determined price, was also “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.
Even after the pullback, gold is still up by more than 17% in January, headed for its sharpest monthly gain since the early 80s. The jump in silver has been eye-watering, with the white metal up nearly 40% so far this year.
Chinese investors have been a key driver of the wider rally in metals, buying in such force that it prompted the Shanghai Futures Exchange to rush out measures to cool the surge. China’s only pure-play silver fund, meanwhile, had to halt trading briefly and turned away new investors, as too much money piled in.
Friday’s selloff was partly driven by profit-taking by speculators, said Andreas Schuler, FX and precious metals trader at Basler Kantonalbank. Long standing investors like private banks and institutional buyers have not moved, he added, noting that silver had seen extreme sell-offs in recent months, and days later ended up trading higher than before.
With gold and silver jumping so much already this year, some technical indicators flashed warning signs. One is the relative-strength index, which in recent weeks signalled that both metals may have become overbought, due for a correction. Gold’s RSI recently hit 90, the highest it has been for the precious metal in decades.
“The extent of the correction suggests that market participants were simply waiting for an opportunity to take profits after the rapid price rise,” analysts at Commerzbank AG wrote in a note Friday.
President Donald Trump said he intends to nominate Warsh to be the next chair of the Fed in a post yesterday.
The former Fed governor has a longstanding reputation as an inflation hawk, but has aligned himself with the president in recent months by arguing publicly for lower interest rates.
Meanwhile, the risk of another US government shutdown was avoided after Trump and Senate Democrats reached a tentative deal.
The White House is continuing to negotiate with Democrats on placing new limits on immigration raids that have provoked a national outcry.