Gold prices plunged to their lowest in more than five years yesterday, at one point dropping four per cent on aggressive selling out of China, while the US dollar hit a three-month high on expectations for higher US interest rates.
Major US and European equity indexes posted modest gains.
The dramatic sell-off in gold came in a matter of minutes in Shanghai. More than 3.3 million lots of a key contract traded there, far surpassing average daily volume of about 30,000 contracts.
The exact reason for the selling was unclear. Recent strength in the US currency and expectations for higher US rates have undermined the case for holding gold and other precious metals, while analysts also noted that China imported a record volume of gold in 2013 that has created an oversupply situation.
Still, the swiftness of the decline surprised traders and resulted in two separate trade halts in US gold futures.
The spot price for gold was at $1,109.75 an ounce, after hitting a low of $1,088.50 overnight.
“We have breached significant support levels, we know US rate hikes are coming, there is no inflation and there is no catalyst to hold gold when other markets are doing better,” Societe Generale analyst Robin Bhar said.
The dollar jumped to its highest since April 23 against a basket of major currencies but was then flat on the day.
The greenback posted its best weekly performance in about two months last week after Federal Reserve Chair Janet Yellen reiterated that US interest rates will probably rise later in the year.
Global equity markets held close to Friday’s three-week highs and European shares approached seven-week peaks as Greece-related fears continued to recede.
The country’s banks reopened for the first time in three weeks following a deal to start talks on a new bailout. The pan-European FTSEurofirst 300 index rose 0.3 per cent to its highest since late May.
On Wall Street, the Dow Jones industrial average rose 30.6 points, or 0.17 percent, to 18,117.05, the S&P 500 gained 2.64 points, or 0.12 percent, to 2,129.28 and the Nasdaq Composite added 9.12 points, or 0.18 per cent, to 5,219.26.
The Nasdaq hit a record on Friday after strong results from Google Tech earnings will dominate reports this week. Investment bank Morgan Stanley’s shares rose 1.2 per cent following its results.
The euro fell to its lowest since late May on the EBS trading platform but last traded up 0.2 per cent at $1.0870.
The yen dropped 0.2 per cent to 124.38 to the dollar.
Yields on southern eurozone government bonds - those considered most vulnerable to the Greece crisis – rose on signs of a return to normality. Spanish and Italian 10-year yields both rose about 9 basis points, to 1.92 and 1.89 percent respectively.
The yield on the 10-year US Treasury bond rose to 2.375 percent, as the price fell 5/32 of a point.
Crude oil prices edged lower. Brent crude was last down 37 cents a barrel at $56.73. US crude was down 50 cents at $50.39.