The price of gold stabilizes after registering its biggest drop in twelve years due to fear of a ‘bubble’

Calm has returned this Wednesday for gold after hours of storm in the commodity markets. The safe haven asset par excellence recorded its biggest drop in twelve years on Tuesday due to fear that its price, which shoots around 60% so far this year alone, is overvalued. In recent hours, the precious metal has surpassed the historical level of 4,300 euros per ounce, later collapsing by more than 6% and trading slightly below $4,100. In its fall, it dragged silver with it, which plummeted more than 8% in the previous session.

“Technical sales have been the main culprit,” Suki Cooper, head of commodities research at the British bank Standard Chartered, told Bloomberg. “Prices have been operating in overbought territory since early September,” adds the expert, who also emphasizes that they are confident that gold will regain its momentum next year.

Since mid-August, gold has embarked on a ‘rally’ as investors have sought to avoid sovereign debt and currencies to protect themselves from growing budget deficits, and expectations that the Federal Reserve (Fed) will press ahead with rate cuts in the United States between now and the end of the year. These two factors have given an ‘extra’ boost to its traditional value as a safe haven asset, especially in the face of the aggressiveness of the White House’s trade policy and in the midst of strong geopolitical tensions at the international level (Gaza, Ukraine…).

“The growing doubts about the sovereign debt sustainabilitystarting with that of the United States; emerging market central banks are replacing dollar reserves with gold; and the growing private demand, although starting from a very low base”, are the reasons referred to by Generali Investments.

In this case, the action of central banks, which seek to reduce their exposure to the dollar, is also being decisive, as well as the push by exchange-traded funds (ETFs) and the desire of retail investors to join the bandwagon of increasingly stronger gold. However, Tuesday’s strong correction has caused movements among large firms.

Thus, Citigroup has reduced its recommendation to “overweight” and expects the price per ounce to consolidate around $4,000. “We continue to believe that a consolidation is much more likely than a correction“, agree from the Swiss private bank Julius Baer and highlight how the fundamentals remain favorable, particularly for gold and silver.

The falls also coincide with possible progress in trade negotiations between Washington and Beijing, after a recent rise in tensions that also favored the demand for safe haven assets. The president, Donald Trump, assured on Tuesday that an upcoming meeting with the Chinese president Xi Jinping will lead to a “good trade deal.”

A shake in the silver

From Bloomberg They add to the above that the partial US government shutdown It has also left operators without one of their most valuable tools: the Commodity Futures Trading Commission (CFTC) weekly report. This document shows how hedge funds and other managers are positioned in US gold and silver futures. Without that data, speculators could take on abnormally large positions one way or another.

The recent movements of the silver have been even more drastic than those of gold. It started from a historic shortage in the London market which catapulted prices above the 1980 record last week. Reference prices outperformed New York futures, prompting traders to send metal to the British capital to alleviate the shortage. On Tuesday, silver inventories in warehouses linked to the Shanghai Futures Exchange recorded their largest daily outflow since February, while stocks in New York also fell.