Glow fades as gold hit by steepest selloff in years

Gold and silver have steadied after their steepest selloff in years, as investors locked in profits on concern that the recent historic rally in the precious metals left them overvalued.

Spot gold traded near $US4120 an ounce after tumbling as much as 6.3 per cent overnight Tuesday — the biggest intraday decline in more than a dozen years — while spot silver slumped as much as 8.7 per cent in the previous session. Technical indicators had shown a scorching rally in both precious metals was likely overstretched.

The pullback brought an abrupt halt to a scorching weeks-long rally that had seen both precious metals post record highs in recent trading days.

Gold had soared in large part because of bets on the Federal Reserve making at least one outsized rate cut by year-end, as well as the so-called debasement trade, in which some investors have pulled away from sovereign debt and currencies to protect themselves from runaway budget deficits.

Gold’s pullback emanates from a combination of quite powerful technical indicators, according to Frank Monkam, head of macro trading at Buffalo Bayou Commodities. He sees strong support between $US4000 and $US4050/oz and expects prices to climb again after returning from overbought positions.

“A positioning cleanup should set us up for the next leg higher, led by ETFs” and emerging markets central banks flows, he said.

The correction in gold and silver 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. President Donald Trump on Tuesday predicted an upcoming meeting with Xi Jinping would yield a “good deal” on trade — while also conceding that the highly anticipated talks may not happen.

Elsewhere, the shutdown of India — the second-biggest gold buyer — for the Diwali festival has also drained the market of significant liquidity. In the silver market — which unlike gold is not just a store of wealth, but a metal with industrial utility — the gains in recent weeks have if anything been even more dramatic.

A historic squeeze in the London silver market last week drove prices beyond the record set in 1980, during a notorious attempt by the Hunt brothers to corner the market.

Benchmark prices traded above New York futures, prompting traders to ship metal to the UK capital to ease tightness. On Tuesday, silver in vaults linked to the Shanghai Futures Exchange saw the biggest one-day outflow of silver since February, while New York stockpiles have also fallen.

Spot gold was down 0.1 per cent to $US4121.07/oz at 6.20am after closing the previous session 5.3 per cent lower. Silver slipped 0.2 per cent to $US48.5995/oz. Platinum and palladium also dipped, after posting losses of more than 5 per cent apiece on Tuesday.

Bloomberg