Gold, silver prices plunge as Trump’s Fed chair pick triggers selloff

[Ben Graham]

Gold and silver prices plunged on Friday as a rebound in the US dollar prompted investors to book profits on the metals, which have rallied to record highs in recent weeks.

Spot gold fell as much as 6% and is now settling at just above $5,000 an ounce, while silver took a bigger hit of 15% before bouncing back to $100 an ounce. Both metals hit record highs earlier this week, with gold peaking at nearly $5,600 an ounce and silver above $121 an ounce.

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The declines — the biggest since October — follow a historically volatile session on Thursday, where the metals suffered a similar downswing and then U-turned back up.

The downward move began during overnight trading after reports came out that the Trump administration plans to nominate Kevin Warsh as the next Federal Reserve chair, which it confirmed on Friday.

Even before the Fed chair nomination, the metals have already been primed for extreme moves, as soaring prices and volatility strained traders’ risk models. A record wave of purchases of call options also mechanically reinforced “upward price momentum,” Goldman Sachs said in a recent note.

Meanwhile, US equities continued to slide on the Warsh pick, given his hawkish stance in the past. Traders’ hopes for rate cuts were dealt another blow on Friday after a hotter-than-expected producer price report.

Due for correction

While reports of Warsh’s nomination were a trigger, a correction was overdue, said Christopher Wong, a strategist at Oversea-Chinese Banking Corp., noting that this “validates the cautionary tale of fast-up, fast-down” nature of the moves seen in gold and silver.

“It’s like one of those excuses markets are waiting for to unwind those parabolic moves,” he added.

Still, despite this significant pullback, both gold and silver are up 24% and 39% respectively so far this year, and are on track to have their best month since 1980.

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The extent of the correction “suggests that market participants were simply waiting for an opportunity to take profits after the rapid price rise,” analysts at Commerzbank AG also wrote in a note Friday.

Still, while rumours of Warsh’s appointment may have triggered the fall, there is a high probability that the Fed “will yield to pressure to at least some extent and cut interest rates more than is currently priced in by the market,” they added.

Warning signs

According to Bloomberg analysis, some technical indicators have been flashing warning signs. One is the relative-strength index (RSI), which in recent weeks signaled that the metals may have become overbought and due a correction. Gold’s RSI recently hit 90, its highest in decades.

“The silver/gold ratio has climbed almost as much as it did in the late 1970s, and today’s dramatic moves show that might have marked a rejection point. Gold and silver separately, however, so far never quite matched their 1979 rallies,” Bloomberg macro strategist Simon White wrote.

“Whether silver versus gold marks the end of a historic rally in precious metals, it’s too early to say. But price is now taking over as the primary driver, and fundamentals will take a back seat for now.”

(With files from Bloomberg)