Gold and Silver Plunge as Wild Swings Rock Metals Markets

A wave of investor demand into 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 hefty 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, now confirmed.

The greenback's rally undercut sentiment among investors who had been piling into metals after the president signaled a willingness to let the currency weaken.

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.

Bullion's slide may have been accelerated by a so-called gamma squeeze. That's where dealers that are short options need to buy more futures — or shares in the case of the gold exchange-traded funds — as prices rise through levels of large options holdings and sell as they fall back through, to keep their portfolios balanced.

For the SPDR Gold Shares ETF, there were large positions expiring Friday at $465 and $455, while on Comex, sizable March and April options positions were at $5,300, $5,200 and $5,100.

The metals rout also drove down shares of major mining companies including top gold producers Newmont Corp., Barrick Mining Corp. and Agnico Eagle Mines Ltd., whose shares had slid more than 8% in New York trading.

Even after the pullback, gold is still up more than 10% in January. Silver is up about 14%.

The extent of the correction "suggests that market participants were simply waiting for an opportunity to take profits after the rapid price rise," analysts in Commerzbank AG wrote in a note Friday.

Still, while rumours of Warsh's appointment may have triggered the fall, there is a high probability that the Fed "will yield to pressure to at least some extent and cut interest rates more than is currently priced in by the market," Commerzbank said.

With gold and silver jumping so much already this year, some technical indicators flashed warning signs. One is the relative-strength index, which in recent weeks signaled that both metals may have become overbought and due a correction. Gold's RSI recently hit 90, the highest it has been for the precious metal in decades.

Volatility is very extreme and both psychological resistance levels of $5,000 and $100 respectively have been broken numerous times on Friday, according to Dominik Sperzel, head of trading at Heraeus Precious Metals. "We need to prepare for the roller-coaster to continue though."

Chinese investors have led the charge, buying in such force that it prompted the Shanghai Futures Exchange to rush out measures to cool the surge in precious and industrial metal markets.

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