Gold has long been the go-to diversification and safety trade for investors during times of chaos. But the sheer scale of the recent gold rally — silver and copper along for the ride — indicates that the price action has taken on a life of its own.
Friday gave a sign that investors have started to get more in touch with reality. The reduction in macro uncertainty following Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve chair triggered extreme profit-taking. Gold prices fell around 9 per cent, while silver prices plummeted about 26 per cent.
Macro uncertainty has been a big driver of prices over the past few months, and traditionally, metals prices have moved higher with a weaker dollar. However, the dramatic scale of the price rises and falls is historic. Retail investors flooding into precious metals-backed ETFs have turbocharged the price moves — particularly for gold and silver, and to a lesser extent copper, according to Hamad Hussain at Capital Economics. “This is [the] recent money which came into the market the last few months, but by nature is volatile,” said James Steel of HSBC.
As Unhedged has noted before, gold has become a momentum trade, and the risk for investors is global sanity. But even if gold prices retreated below $4,000, they would still be just at their levels about five months ago and still historically high. Gold also has a safety net in the form of central bank purchases. Meanwhile, silver and copper, which are mostly used for industrial purposes, are sensitive to cyclical booms and busts. Are Friday’s events enough to convince investors macro fears have been overdone and a fading of the momentum trade, or is the speculative rally just catching its next breath? Let us know your thoughts: unhedged@ft.com.
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