The price of gold tumbled sharply on Monday, recording its biggest daily drop on record in terms of its price in US dollars. Markets were at a loss over the precise drivers of the sharp fall in commodity prices, but the nine per cent plunge was attributed to a mix of factors and appears to have been driven by aggressive selling by speculative traders, rather than any shift in long-term or fundamental drivers.
Markets were at a loss over the precise drivers of the sharp fall in commodity prices
Gold dropped more than $160 from high to low, but the drop was not however its largest fall ever in terms of percentage. In 1983 gold bullion plummeted almost double that of yesterday. There was however another record broken, as Reuters reported that trading volumes hit a record high, exceeding 700,000 lots traded, almost four times the 30-day average.
The gold rout led to a broad plunge in commodity prices however the precious yellow metal was the hardest hit, together with silver which shed 11 per cent. Bullion’s collapse started last Friday, as rumours that the Central Bank of Cyprus might sell gold reserves to finance its European Union bailout spooked investors who grew concerned that other European governments may have to follow in the same path.
The spot price of gold (XAU/USD), which slipped more than 13 per cent from Friday’s open to Monday’s close, accelerated its sell-off after a rush of stops were triggered below the key $1,500 support level. It fell to $1,321.96 by the time of writing, its lowest since January 2011.
Another factor putting pressure on metals at the start of the week was weak growth data out of China. China’s economy grew at a slower pace of 7.7 per cent year-over-year against market expectations for eight per cent, putting pressure on commodity prices.
Over the past few months investors have been disappointed by the performance of gold, which has been unable to surpass the $1,800 mark, despite record stimulus measures taken by the US Federal Reserve and other major Central Banks, like more recently, the Bank of Japan. Price action had eased below $1,800 after hitting an all-time peak by $1,921.18 in September 2011, and has ever since failed repeatedly to regain those levels.
These aggressive easing measures taken by policymakers to stimulate their economies did not materialise in an outburst of inflationary pressure as many feared. In fact, recent data from the US and China have pointed at decreasing inflation, reducing gold’s value as a hedge against increasing prices.
Silver was the other major loser at the start of the week. Spot silver (XAG/USD) fell to 22.07, its lowest since October 2010. By the time of writing, both gold and silver had regained some ground after the sharp sell-off. XAU/USD was up to $1,403.63 while XAG/USD rose to 23.97, but investors remained nervous about the state of the global economy. It remains to be seen whether the yellow metal has now entered a predominant bear market after 12 years of consecutive annual gains. Needless to say, the sharp moves in commodity prices eventually spilled over to currency markets. AUD/USD fell 1.8 per cent on Monday and AUD/JPY plunged 3.9 per cent, while NZD/USD dived more than 200 pips from its session high to a low of 0.8378.
The Japanese yen, with the US dollar benefitted largely from Monday’s flight to safety by investors. Selling pressure on the yen lost momentum late last week after the US Treasury Department said it would watch Japan closely to ensure Tokyo was not devaluing its currency to obtain a competitive advantage on exports.
The department added that it will push Japan to keep its commitments made to G7 and G20 partners to allow market determined exchange rates.
USD/JPY fell to 95.82 on Tuesday but the recovery in gold and US stock futures dampened demand for safety assets, and the pair quickly bounced to trade at 98.14 by the time of writing.
EUR/USD also rose above resistance marked by its four-week highs at 1.3138, to hit a fresh six-week peak by 1.3148 by the time of writing. A break of 1.3165 will pave the way for further upside gains to February 25 highs by 1.3319.
Upcoming FX key events
Today: US Weekly jobless claims and US Philadelphia Fed index.
Tomorrow: German PPI, EZ Current account and Canadian CPI.
Technical key points
EUR/USD is neutral.
EUR/GBP is bullish, target 0.88, key reversal point 0.84.
USD/JPY is bullish, target 101.50, key reversal point 90.50.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Emman Xuereb is a trader at RTFX Ltd.