By Jack Ryan, Yihui Xie and Yvonne Yue Li | Bloomberg
Gold suffered its biggest slide in decades and silver posted a record intraday decline in a whipsawing reversal of a scorching rally that lifted prices to all-time highs.
Gold fell more than 12% to slump below $5,000 an ounce in its biggest daily decline since the early 1980s. Silver plunged more than 36%, a record intraday decline, as the selloff swept through the broader metals markets. Copper fell 3.4% in London, retreating from Thursday’s record high. The dollar rose, making commodities priced in US currency more expensive.
A wave of investor demand for 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 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, a move later confirmed. The greenback’s rally undercut sentiment among investors who had been piling into metals after the US president signaled a willingness to let the currency weaken.
“Trump announcing Warsh as his pick for next Fed Chair has been a US dollar positive and precious metals negative,” said Aakash Doshi, global head of gold and metals strategy at State Street Investment Management. “This has probably been exacerbated by month-end rebalancing as both short dollar and long precious metals has been the consensus macro trade over the past two to three weeks.”
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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