(Oct 22): Gold extended losses in a choppy session, after suffering the worst rout in over 12 years on Tuesday on concerns its rally had run too far, too fast.
Spot gold slid below US$4,020 an ounce as US trading got underway, after swings that saw it slump almost 3% earlier and then recover. That was a day after bullion tumbled as much as 6.3%, with technical indicators showing a price surge that broke successive records this year was likely overstretched.
“Technical selling has been the main culprit,” said Suki Cooper, head of commodities research at Standard Chartered plc. “Prices have been trading in overbought territory since the start of September,” she said, adding that the bank expected gold to regain its momentum next year.
The pullback brought an abrupt halt to rapid advances that have been underway since mid-August. The so-called debasement trade, in which investors avoid sovereign debt and currencies to protect themselves from runaway budget deficits, and bets the Federal Reserve will make at least one outsized rate cut by the end of the year have been the primary drivers in recent months. Gold is still up about 55% this year.
After sitting on the sidelines for much of the early period of gold’s rally, retail investors have taken a bigger role in recent months, in part enthused by the debasement theme. Pictures showing queues of buyers lining up outside bullion retailers went viral on social media. Options volume on the top gold-backed ETFs and futures contracts, a popular way for retail investors to take big bets on the metal’s value, has surged.
See also: Gold and silver hit records on credit fears, US-China tensions
President Donald Trump’s aggressive moves to try and reshape global trade and heightened geopolitical uncertainty have underlined the move higher in precious metals this year. Central banks keen to diversify away from the dollar have kept buying, while there’s also been flows into exchange-traded funds as retail investors tried to get in on the rally.
Citigroup Inc cut its overweight gold recommendation after the slump on Tuesday, citing concerns about stretched positioning. The bank expects further consolidation around US$4,000 an ounce in the coming weeks, strategists including Charlie Massy-Collier said in a note.
“Eventually the older part of the gold bull story — continued central bank demand to diversify away from the US dollar — may come back, but at current levels there is no rush to position for that,” they wrote, adding that prices had “run ahead of the ‘debasement’ story.”
See also: Dimon says it’s ‘semi-rational’ to hold gold in your portfolio
The declines also came as investors weighed potential progress in talks between the US and China, following a recent resurgence in tensions that had bolstered demand for haven assets. Trump on Tuesday predicted an upcoming meeting with Chinese President Xi Jinping would yield a “good deal” on trade — while also conceding the talks may not happen.
The US government shutdown has also meant traders have been left 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. Without the data, speculators may be more likely to build abnormally large positions one way or another.
Spot gold fell 1.5% to US$4,063.63 an ounce as of 9.15am in New York. Silver was 0.6% lower after swinging between gains and losses, following a 7.1% plunge on Tuesday. Platinum and palladium advanced. The Bloomberg Dollar Spot Index inched up.
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