Gold Prices Experience Volatility After Largest Sell-off

SadaNews - Gold and silver prices fluctuated on Wednesday after experiencing the largest sell-off in years on Tuesday, amid fears that the recent significant rally has made prices overvalued.

Spot gold traded near $4,140 an ounce after a drop of 6.3% in the previous session, marking its largest daily decline in more than 12 years. Silver, on the other hand, saw a slight increase after falling by 8.7% during Tuesday's session. These declines followed signals from technical indicators that the strong upswing in precious metals was in a technically overbought zone.

Sharp Correction After Record Surge

This sudden downturn halted a momentum that had been continuous for months, which had driven gold and silver to register new record levels in recent days.

Gold concluded nine consecutive weeks of gains, while prices remain approximately 55% higher since the start of the year, supported by central bank purchases, strong inflows into exchange-traded funds, as well as the increasing demand for safe havens amid trade and geopolitical tensions.

Nicolas Frabel, Head of Global Institutional Markets at ABC Refinery in Sydney, said: "People might have simply thought: what is stopping us? Most of us are in long positions at excellent levels, so it’s a good time to take profits."

Bets on Interest Rate Cuts Supported Gold and Silver Prices

Gold’s rise was primarily supported by bets that the Federal Reserve would undertake a significant interest rate cut before the end of the year, along with what is known as the "devaluation trade," where some investors are moving away from sovereign debt and currencies to hedge against rising fiscal deficits.

After Tuesday's decline, Citigroup downgraded its overweight recommendation on gold, warning of excessive concentration in long positions. The commodities research team at the bank, led by Charlie Masi-Collier, stated that they expect a consolidation period around the $4,000 an ounce level over the upcoming weeks.

They added: "Old factors supporting gold, such as continued central bank purchases and diversifying away from the US dollar, may return later, but at current levels, there’s no need to rush into buying, as prices have exceeded the rationale of the 'devaluation story.'"

Analysts: The Correction is Huge but Normal

From a technical standpoint, this move, although significant, represents a correction in prices, according to Nick Twydale, Senior Market Analyst at AT Global Markets in Sydney.

He added: "My simple interpretation is that the market saw massive flows for reallocation of investments, and some big players took profits, triggering stop-loss orders during the drop. If the price clearly falls below the $4,000 level, we could see a larger sell-off."

Pressures from Signs of Progress in Trade Talks

These falls also came as investors evaluated the likelihood of progress in trade talks between the United States and China, following a period of renewed tensions that had boosted demand for safe havens.

US President Donald Trump had predicted on Tuesday that his upcoming meetings with Chinese President Xi Jinping would yield a "good deal" on trade, but he also acknowledged the possibility that talks might not take place soon.

As for silver, the market witnessed a historic contraction of liquidity in London last week, pushing prices past the highs recorded in 1980 during the Hunt brothers' attempt to corner the market at that time.

Reference prices in London traded above New York futures prices, prompting traders to ship the metal to the British capital to alleviate supply shortages. Additionally, the warehouses linked to the Shanghai Futures Exchange saw the largest daily withdrawal of silver since February, while inventories in New York also declined.