(Bloomberg) — Gold slid the most in four years, after gaining for weeks in a rapid rally that has stretched technical indicators.
Bullion fell by as much as 3.8%, after hitting a fresh peak of $4,381.52 an ounce on Monday. Gold’s ferocious rally has measures like relative strength indicating that prices have passed well into overbought territory. A strengthening US dollar has also made precious metals more expensive for most buyers.
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Haven demand for precious metals has cooled somewhat as US President Donald Trump and China’s Xi Jinping are set to meet next week to iron out their differences on trade, and a seasonal buying spree in India has ended.
“In the last couple of trading sessions traders have increasingly been looking over their shoulders, as concerns about a correction and consolidation have arisen,” said Ole Hansen, commodities strategist at Saxo Bank AS. “It’s during corrections that a market’s true strength is revealed, and this time should be no different, with an underlying bid likely keeping any pullback limited.”
With the ongoing US government shutdown, commodity traders have also been left without one of their most valuable tools — a weekly report from the Commodity Futures Trading Commission that indicates how hedge funds and other money managers are positioned in US gold and silver futures. Without the data, speculators may be more likely to build abnormally large positions one way or another.
“The absence of positioning data comes at a delicate time, with a potential build-up in speculative long exposure in both metals making both more vulnerable to correction,” Hansen said.
Volatility in precious metals has surged in recent days, with traders seeking to hedge against potential price drops in other parts of their portfolios, or profit from the fall. More than 2 million options contracts linked to the world’s largest gold-backed exchange traded fund were traded on both Thursday and Friday of last week, surpassing a previous record.
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“As of now, ETFs’ gold holdings in absolute terms haven’t reached the peaks hit in the past, and rallies have often extended for much longer. But history shows that momentum eventually fades and in most cases, the buying morphs into selling. If delayed data eventually reveal a sturdier US economy than anticipated, a larger gold pullback may not be far off.”