After suffering its biggest drop in more than a decade on Friday, gold’s decline continued, and the price of silver also fell further, reversing the record-breaking rally that had seemed to rise too fast and too far.
Spot gold prices once dropped by 8%, and currently have fallen by nearly one fifth from the record high set on Thursday. Silver prices plunged by 14.6% on Monday, after having recorded the largest intraday decline in history the previous day.
“It’s not over yet,” said Robert Gottlieb, a former JPMorgan precious metals trader and current independent market commentator, adding that reluctance to take on further risk would limit market liquidity. “We’ll have to see if it can find support. Ultimately, this trade was just too crowded.”
Precious metal prices have soared to record highs, even shocking seasoned traders. In January, as investors’ concerns over geopolitical turmoil, currency devaluation and the independence of the Federal Reserve intensified, they flocked to the gold and silver markets, further accelerating the already red-hot rally. Buying by Chinese speculators also pushed the rally even higher.
The extent to which Chinese investors buy at lower prices will play a key role in determining the future direction of the market. Although the benchmark gold price in Shanghai fell further after the opening, it remained higher than the international gold price. Last weekend, buyers flocked to Shenzhen, China’s largest precious metals trading market, to stock up on gold jewelry and gold bars for the upcoming Chinese New Year.
Wu Zijie, an analyst at Jinchuan Futures, said, “Increased volatility coupled with the approaching Lunar New Year will prompt traders to reduce their positions and lower risks.” He also said that at the same time, especially during the peak shopping season, price corrections might support retail demand in China.
The trigger for the stock market’s sharp fall on Friday was the news that US President Trump nominated Kevin Warsh as the chairperson of the Federal Reserve. This news pushed up the exchange rate of the US dollar and undermined the confidence of investors who had previously bet that Trump would be willing to let the dollar weaken. Traders believe that Warsh is the most hardline anti-inflationist among the final candidates, which raised market expectations for tighter monetary policy. Tighter monetary policy will support the US dollar and weaken the price of gold denominated in US dollars.
But precious metal prices have already experienced wild swings. The soaring prices and sharp fluctuations have put intense pressure on traders’ risk models and balance sheets. In a report, Goldman Sachs Group pointed out that the record-breaking buying spree of call options (which give the holder the right to purchase precious metals at a pre-determined price) “fundamentally strengthened the upward momentum of prices” as option sellers hedged against the risk of price increases by buying more options.
Wang Yanqing, an analyst with a Chinese futures company, pointed out in a report that a large amount of hot money flowing into China has led to a tight domestic supply of silver. However, as the market slump curbs investment demand, this situation may ease. He said, “Once the expectation of a one-sided rise in the market is broken, the willingness of short sellers to deliver will increase, which will help ease the supply shortage.”
Technical analysis:
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Gold: The current rate of price correction has set a new historical record, but there is no sign of a trend reversal yet. We do not recommend a large-scale short position reversal today, but long positions also need a clearer signal. We suggest referring to whether the level around 4650-4700 can be recaptured. For detailed positions, please consult the plugin.
(Gold 15-minute chart)
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Nasdaq: On Friday, after the liquidity was swept at the low point, a rebound was caught, which could achieve a 1:1 profit-loss ratio. However, the price is still setting new stage lows. For the day, we suggest waiting for the price to recover above the 25,450/25,400 level before considering a pullback confirmation for a long position signal. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: The US did not take further military actions over the weekend, and oil prices gapped lower and continued to decline on Monday. During the day, it is recommended to pay attention to the liquidity situation near 61/61.50 for shorting. If a rebound occurs after the shorting, you can try to catch one rebound. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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Today’s key financial data and events to focus on:
23:00 US January ISM Manufacturing Purchasing Managers’ Index
