Gold prices fell more than $118 per ounce yesterday. It’s the largest one-day dollar loss in more than seven years as hope for a coronavirus vaccine. Additionally, a slowdown in new cases pushed stocks and Treasury yields higher.
Edward Moya, senior market analyst at Oanda, said a report that Russia has developed a coronavirus vaccine had an effect. It served as everything traders needed to lock-in their profits from the recent surge in prices.
The Vaccine and Precious Metals
“Traders who were looking for an excuse to lock-in profits with their bullish gold bets jumped all over Russia’s vaccine news. It didn’t matter that this was somewhat telegraphed,” said Moya. He also said that Russians only starting Phase 3 didn’t matter.
Silver also fell $4.38 per ounce, it’s largest dollar loss on a daily basis since Sept. 23, 2011.
Brien Lundin, editor of Gold Newsletter, went on an interview with MarketWatch. There, he said many investors were actually hoping for a small correction. They wanted one so that they could get into gold and silver before the next leg higher.
“Gold and silver’s run over the past couple of weeks was dizzying in its trajectory and just about everyone marveling at that rise was expecting, and even hoping for, a correction. Well, it’s here, and the metals are simply releasing a bit of the air that had overinflated the market,” said Lundin.
“There was tremendous anecdotal evidence that a great swath of investors had bought into the long-term story for gold and silver and were simply waiting for a pull-back to get in,” he added. “I would expect there’s some reality to this view, and that we’ll see a big influx of investment once it appears that gold has bottomed.”
Reasons for the Climb
Bart Melek, head of global strategy at TD Securities said the recent climb was due to a number of reasons. This includes a falling dollar, lower interest rates, and higher inflation. When the US dollar went against expectations and actually showed strength, precious metals investors quickly headed for the exit.
“The precious metals complex, which posted a spectacular performance over the summer, was driven by a drop in rates, a steady increase in inflation expectations and a falling USD,” said Melek. “The rally is now giving up some of these gains as these drivers lose momentum. Real rates are now rising along with nominal yields due to stimulus optimism and risk appetite, with the USD also off its lows.”
Melek also believes that gold and silver dropped as some investors booked profits. Also, what he says are expectations of an economic recovery due to more stimulus money.
“Specs and CTAs are reducing their gold and silver exposure,” Melek said. This happened “as volatility trends higher and as they take profits out of a crowded trade. The rapid rate of ETF gold and silver purchases, which have been a key driver for the summer rally, are also losing momentum,” he added. The “U.S. economy will continue to positively respond to an additional trillion dollars worth of fiscal stimulus and continued Fed measures,” Melek also mentioned. Given this, “it is quite likely that rates and the dollar may see some better days into 2020.”
Melek adds that the dip in prices is a buying opportunity.
“Correction represents a second chance to get on the gold, silver bandwagon.”