Brake on the shine of gold and silver
Gold, which has always been considered the safest investment, is currently going through a period of great turmoil. After touching record breaking highs, gold prices have recorded their worst one-day fall in the last 12 years. This sharp selling started on Tuesday and continued on Wednesday also.
The main reason for this sudden panic in the market is the huge profit-taking being done by the investors. There was a huge increase in the prices of gold and silver this year, due to which there was growing concern that a ‘bubble’ might be forming. Now the same investors, who were sitting on high prices, have rushed into the market to collect their profits, due to which this crash in prices has been seen.
Huge profit booking at record level
Market analysts say that this decline is mainly a wave of ‘profit-taking’, which turned into a tsunami in no time. According to Tim Waterer, chief market analyst at KCM Trade, “The profit-taking trend has snowballed.” He said that gold prices had reached levels never seen before in the market, so this was a big temptation for traders to reap profits.
If we look at the data, there was a huge fall of 6.3% in gold prices on Tuesday, which is the biggest single day fall in the last 12 years. This trend did not stop and on Wednesday gold fell another 2.9% to $4,004.26 per ounce. The condition of silver was even worse. After falling 7.1% in the previous session, silver fell more than 2% to around $47.6 on Wednesday.
Mixed trend in stock markets
The effect of this huge fall in gold and silver is being seen on other markets around the world as well, although there is no such panic in the stock markets. There was a mixed trend in Asian markets. While Australian and Hong Kong stock indices fell in the futures market, Japanese markets remained stable.
In contrast, the American stock market (Wall Street) remained mostly untouched by this turmoil. The S&P 500 closed almost flat on Tuesday. Analysts say that stock market investors are currently focusing on the strong quarterly results being presented by companies in America.
American ‘shutdown’ problem
A major problem amidst all this turmoil is the ‘shutdown’ of the US government, which is on the verge of being prolonged to a record level. The shutdown has created an economic ‘data vacuum’, which has left commodity traders in the dark.
Actually, due to the shutdown, the weekly report of the Commodity Futures Trading Commission (CFTC) is not being released. This report is very important for the market, because it tells how much hedge funds and other large institutional investors are buying or selling (i.e. what is their ‘position’) in the US gold and silver futures market.
In the absence of this data, analysts have to only guess. “Our estimate is that these (buying) positions had become too large in the market and ultimately triggered this significant selloff,” ANZ Group Holdings Ltd. analysts Brian Martin and Daniel Hines said in a note.
Has the shine of gold faded?
Now the biggest question is whether the golden period (bull trend) of gold is over? Most market experts do not believe so. He says that this fall in prices is a ‘correction’ (improvement), which is natural after such a big jump.
According to Fawad Razakzada of City Index, gold’s recent rally was ‘extraordinary’. This was boosted by falling interest rates, continuous purchases by central banks around the world and expectations of further easing of monetary policy in the future. “Markets rarely move in straight lines. It’s too early to say that the broader bullish trend is over,” he said.
Analysts believe that long-term drivers supporting gold are still present. Many analysts also believe that many investors who missed the last big rally may see this fall as an opportunity to ‘buy the dip’. This new buying may prevent the market from falling further.