(Oct 22): Gold was steady and silver edged lower in early Asia trading on Wednesday after the precious metals tumbled from unprecedented highs on Tuesday, while a rally in US stocks wavered amid signs of buyer exhaustion.
Asian equity futures signalled a mixed open, with Tokyo set to gain and Sydney and Hong Kong pointing lower after the S&P 500 closed little changed. Gold lost 5.3% on Tuesday, its biggest daily drop in more than five years, while silver slid 7.1%.
Despite recent de-risking amid concerns over trade and credit, stock exposure among global macro hedge funds and long-only strategies remains at the highest in over a year, according to Barclays plc.
“Our near-term technical outlook is for equities to consolidate/pull back over the next few weeks,” said Craig Johnson at Piper Sandler. “We view pullbacks as healthy and necessary.”
While the US government shutdown has caused an economic data vacuum, drawdowns in equities have been short-lived as investors see them as opportunities to add risk to their portfolios. The closure has also left commodity traders without one of their most valuable tools: a weekly report from the Commodity Futures Trading Commission that indicates how hedge funds and other money managers are positioned in US gold and silver futures.
“We assume such positioning had built to substantial levels and ultimately triggered the selloff,” ANZ Group Holdings Ltd analysts Brian Martin and Daniel Hynes said in a note. “Despite this pullback, we still see long-term drivers in place and providing support to prices.”
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In other markets, the dollar advanced and Treasuries gained, sending the 30-year yield to the lowest since early April, as the US government shutdown is on the cusp of becoming the second-longest on record. Bitcoin bounced.
Oil rose a second day in early trading after President Donald Trump stressed that India would wind down its purchases of oil from Russia, saying for the second straight week that he spoke directly about the matter with Prime Minister Narendra Modi, and after an industry report showed a decline in US inventories.
A confluence of factors dragged down precious metals, including positive trade talks between China and the US, a stronger dollar, overstretched technicals, and uncertainty on investor positioning due to the US government shutdown and the end of a seasonal buying spree in India.
See also: A great year for US stocks? Not compared with rest of the world
Gold’s rally in recent months has been nothing short of extraordinary, fuelled by falling yields, persistent central bank buying, and expectations of further monetary easing, according to Fawad Razaqzada at City Index and Forex.com.
“Markets rarely move in straight lines,” he said. “But it is far too early to suggest that the broader bull trend has ended. While corrections are natural, it is worth pointing out that many investors missed out on the big rally. Soon, they may step in to buy the dip, which should keep the selloff contained.”
Matt Maley at Miller Tabak says he’ll be watching the recent lows for precious metals for signs they will see something more than just a hiccup over the near-term.
“Experience tells us that when you start to see wild swings in an asset after a very large rally it tends to signal that it’s getting ready for material pullback,” Maley said. “It does not necessarily signal the end of the bull market in that asset. However, these kinds of wild moves after very strong rallies can create some fear among investors and traders.”
Some of the main moves in markets:
Stocks
- Hang Seng futures had fallen 0.4% as of 7.18am Tokyo time
- S&P/ASX 200 futures fell 0.5%
- Nikkei 225 futures rose 0.5%
- S&P 500 futures were steady
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Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
Cryptocurrencies
- Bitcoin fell 0.2% to US$110,596.76
- Ether fell 0.4% to US$3,941.78
Bonds
- The yield on 10-year Treasuries declined two basis points to 3.96%
- Australia’s 10-year yield was little changed at 4.11%
Commodities
- Spot gold was little changed at US$4,126.22 an ounce
