SINGAPORE/MUMBAI (Aug 12): Gold sank below US$1,900 an ounce to head for its biggest two-day loss in more than seven years as investors step back from one of the hottest trades of 2020.
After setting a record above US$2,000 an ounce last week, gold’s rally has come to a juddering halt as US bond yields advanced, eroding the haven’s appeal. The swift drop followed modest outflows from gold-backed exchange-traded funds, and a 15-day run in overbought territory for the relative strength index.
Gold had been one of the best-performing commodities this year, with the haven favoured as the coronavirus pandemic pummeled the global economy, prompting central banks and governments to deploy massive stimulus. Its reversal represents a challenge for the metal’s backers, who had pointed to an extended rally in prices.
“We can expect yields to rise further on expectations of a US aid package, which may pressure prices for the short-term,” said Tapan Patel, a senior analyst at HDFC Securities Ltd. “Higher US healthcare costs and the expansion of balance sheets will continue to support gold prices over the longer term.” The correction may be short-lived, with bullion finding support on broad bullish fundamentals amid slower economic growth.
Benchmark Treasury yields have climbed more than 10 basis points so far this month, amid improving risk appetite and an imminent flood of debt issuance. The recent rebound reflects investor hopes that the coronavirus will be contained amid Russia’s Covid-19 vaccine announcement, according to Standard Chartered Plc.
“Once it got to US$2000 per ounce, in a lot of investors’ minds that could have been an opportunity to take profit off the table,” said Gavin Wendt, senior resource analyst at MineLife Pty. News about Russia’s vaccine “was a cue for some investors to take profit from their gold positions and to leap back into equities. It’s a high-risk play, but if you’re sitting on profits, it’s quite a sound strategy,” he said.
Spot gold sank as much as 2.1% to US$1,872.61 an ounce and traded at US$1,882.11 at 12:16 p.m. in Singapore, as gold futures tumbled on the Comex. Silver also dropped sharply, with futures losing more than 9% at one point to trade below US$24 an ounce.
Gold’s still got supporters. DoubleLine Capital LP’s Jeffrey Gundlach said that he expects gold to keep trading higher, despite the setback. Among banks that have forecast substantial gains in recent weeks, Bank of America Corp. has predicted that prices will advance to US$3,000.
“Expectations of a V-shaped recovery from the coronavirus lockdowns remain far-fetched,” Avtar Sandu, senior manager for commodities at broker Phillip Futures in Singapore, said in a note. “The long-term fundamental drivers of gold remain positive in outlook. However, in the short-run, gold prices seem to be reacting to headline news events and the technical picture has projected some consolidation ahead.”