Gold and silver suffered their biggest slide in years, in a whipsawing reversal of a scorching rally that lifted prices to all-time highs.
Gold dropped as much as 8% to crash through $5,000 an ounce, while silver plunged more than 20% in the biggest intraday drop since 2008 as the selloff swept through the broader metals markets. Copper fell almost 4% in London, after surging above $14,000 a ton for the first time 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-honored havens amid concerns about currency debasement and the Federal Reserve’s independence, trade wars and geopolitical tensions.
Both gold and silver are still set for hefty monthly gains, but Friday’s selloff is the biggest 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 Fed chair, now confirmed. The greenback’s rally undercut sentiment among investors who had been piling into metals after the president signaled 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.”
Precious metals had already been primed 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, had 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.
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Bullion’s slide may have been accelerated by a so-called gamma squeeze. That’s where dealers that are short options need to buy more futures — or shares in the case of the gold exchange-traded funds — as prices rise through levels of large options holdings and sell as they fall back through, to keep their portfolios balanced. For the SPDR Gold Shares ETF, there were large positions expiring Friday at $465 and $455, while on Comex, sizable March and April options positions were at $5,300, $5,200 and $5,100.
The metals rout also drove down shares of major mining companies including top gold producers Newmont Corp., Barrick Mining Corp. and Agnico Eagle Mines Ltd., whose shares had slid more than 8% in New York trading.
Even after the pullback, gold is still up around 18% in January, closing in on its sharpest monthly gain since 1980. The jump in silver has been eye-watering, with the white metal up more than 40% so far this year.
The extent of the correction “suggests that market participants were simply waiting for an opportunity to take profits after the rapid price rise,” analysts in Commerzbank AG wrote in a note Friday. Still, while rumours of Warsh’s appointment may have triggered the fall, there is a high probability that the Fed “will yield to pressure to at least some extent and cut interest rates more than is currently priced in by the market,” Commerzbank said.
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 signaled that both metals may have become overbought and due a correction. Gold’s RSI recently hit 90, the highest it has been for the precious metal in decades.
Volatility is very extreme and both psychological resistance levels of $5,000 and $100 respectively have been broken numerous times on Friday, according to Dominik Sperzel, head of trading at Heraeus Precious Metals. “We need to prepare for the roller-coaster to continue though.”
Chinese investors have led the charge, buying in such force that it prompted the Shanghai Futures Exchange to rush out measures to cool the surge in precious and industrial metal markets.
What Bloomberg Strategists Say:
“The silver/gold ratio has climbed almost as much as it did in the late 1970s, and today’s dramatic moves show that might have marked a rejection point. Gold and silver separately, however, so far never quite matched their 1979 rallies. Whether silver versus gold marks the end of an historic rally in precious metals, it’s too early to say. But price is now taking over as the primary driver, and fundamentals will take a back seat for now.”
President Donald Trump said he intends to nominate Warsh to be the next chair of the Fed in a post on Friday. 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. Trump said he would announce his nominee on Friday morning US time.
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.
Spot gold fell 7.4% to $4,977.06 an ounce as of 11:53 a.m. in New York. Silver plunged 20% to $92.96 an ounce, while platinum and palladium also tumbled. The Bloomberg Dollar Spot Index gained 0.6%
