Following a steep decline that began last week, prices for gold and silver staged a rebound on Tuesday. International spot gold once climbed back above $4,950 per ounce, with its intraday gain widening to 6%. The rally in international silver was even more pronounced, briefly surpassing $89 per ounce for a near 12.5% intraday surge.
Yuxuan Tang, Head of Asia Macro Strategy at J.P. Morgan Private Bank, noted, "We are seeing bargain-hunting behavior in the market, which is a common pattern after a 20% drop in asset prices."
Ole Hansen, Head of Commodity Strategy at Saxo Bank, commented, "Gold prices have now broken through the first resistance level at $4,858 and are setting their sights on $5,000—the 50% retracement level of the recent decline. The corresponding levels for silver are higher, at $90.58 and $96.52 respectively."
The sell-off in precious metals commenced last Friday, triggered by the US President's nomination of Kevin Warsh for the next Federal Reserve Chair. Investors perceive Warsh as a more conventional choice compared to other potential candidates, a nomination that has alleviated market concerns regarding the Fed's independence—previously undermined by persistent pressure from the President to lower borrowing costs. The President had even labeled the incumbent Fed Chair, Jerome Powell, a "stubborn mule" for refusing to implement larger interest rate cuts.
During Monday's Asian trading session, gold prices plummeted by as much as 10%, with the losses only narrowing after markets opened in London and New York. Investors and analysts suggested that the sharp plunge during the Asian session yesterday likely stemmed from substantial borrowing by investors in the region to bet on rising precious metal prices.
They indicated that traders who had built speculative positions in precious metals using borrowed funds faced margin calls, forcing them to sell assets to raise cash.
Friday's sharp decline in gold prompted CME Group, the world's largest derivatives exchange operator, to increase margin requirements for gold and silver futures. It is understood that higher margin requirements mean traders have access to less leveraged funding, which could impact precious metal prices in the short term.
The initial catalyst for the current gold rally was increased central bank purchases following the freezing of Russia's foreign reserves after its full-scale military operation in Ukraine. However, the primary driver of gold prices has now shifted to private investors, who are eager to allocate to gold as a hedge against geopolitical uncertainty and concerns about currency debasement by developed market governments.
The extent of bargain-hunting by Chinese investors could play a decisive role in the market's direction. Over the weekend, buyers flocked to Shenzhen, China's largest gold and silver trading market, to stock up on jewelry and gold bars ahead of the Lunar New Year. Chinese markets will be closed for over a week starting February 16th.
Most investment banks remain optimistic about a recovery in gold prices. Deutsche Bank stated on Monday that it maintains its previous forecast for gold to reach $6,000 per ounce this year.
J.P. Morgan's Yuxuan Tang said that the nomination of Warsh "has not fundamentally altered our view on gold holdings," and the bank still expects gold prices to reach a range of $6,000 to $6,300 per ounce by the end of this year.
Tang added, "I believe this correction has squeezed out a significant amount of speculative froth, helping the market return to fundamental analysis and reassess the price trajectory."
Joni Teves, a strategist at UBS Group, wrote in a report, "We believe this adjustment is beneficial for the market in the long run. This period should provide investors with an opportunity to build long-term strategic positions at more attractive entry levels."
Garfield Reynolds, Head of the Bloomberg MLIV team, stated, "The precious metals plunge was essentially a correction that was due to happen. However, the fundamental factors driving their multi-year rally remain intact and are sufficient to curb a sustained decline. Given that global monetary policy is unlikely to tighten rapidly and geopolitical concerns persist, we could see a more moderate uptrend in precious metal prices."
Investors will also be closely monitoring tensions between the US and Iran, after the US President indicated that negotiations on a new nuclear deal could begin in the coming days. A breakthrough in talks could potentially diminish gold's appeal as a safe-haven asset and exert downward pressure on its price.
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