London — The gold spot price dropped nearly 6% day on day, its fifth sharpest one-day drop over the past two decades and its largest daily fall since the sell-off in 2013, analysts said Aug. 12.
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Analysts at precious metal refiner MKS PAMP said gold traded to a high of $1926/oz in early Asian hours before falling $50 to $1872/oz, with gold rebounding toward $1900/oz and then falling again to $1862/oz.
"The $115/oz (5.7%) drop is the worst in over seven years," Canaccord Genuity analysts said in a research note.
"We view today's [Aug. 12] sell-off as a price correction given the strong upward price pressure in gold over the past few months, and more acutely over the past few weeks, rather than the start of a more bearish outlook for gold."
Compared with the Aug. 7 highs, when the gold spot price peaked at around $2,075/oz, the drop represents a fall of around $200.
"This is on roughly the same scale as the historic two-day sell-off in April 2013. Back then, it took nearly seven years for prices to regain their previous levels. No such prolonged period is likely this time, however," Commerzbank commodities analyst Carsten Fritsch said in a note.
"This is because the fundamental environment remains extremely positive for gold thanks to negative real interest rates, an unprecedented increase in the money supply and ballooning debt."
The gold spot price, as of 1100 GMT Aug. 12, was around $1,932/oz.
Standard Chartered Bank precious metals analyst Suki Cooper said in a note that gold prices were overbought, and susceptible to profit-taking above $2,000/oz.
"Having tested all-time highs, gold prices lost momentum as the dollar recouped some of its losses, having tested lows last seen in May 2018; real yields recovered from lows last seen in April 2013," Copper said.
"Although real rates remain the main driver of gold prices (three-month rolling correlation: 40%), gold's relationship with the DXY [US Dollar Index] has strengthened of late (three-month rolling correlation: -28%, but one-month rolling correlation: -57%). The absence of a US stimulus package agreement and a stronger-than-expected US non-farm payrolls report triggered some profit-taking late last week."
Copper added that the fast pace of the recent rally made a correction increasingly likely.
Emirates NBD market economics senior director Edward Bell said in a note: "The immediate catalyst for the sell-off in gold appears to be the uptick in US Treasury yields. Yields on 10-year US Treasuries have gained over 10 basis points since the start of the week, trading at around 0.67% at present."
On the subject of the US stimulus package agreement, late last week, after two weeks of talks between congressional Democrats and administration officials failed to produce a much needed fiscal aid package, with Congress now in recess for a month.
"Both gold and US Treasury markets will be anxiously watching the outcome of political debates between the Trump administration, Senate Republicans and House Democrats in the US as to whether a new fiscal support package can be achieved," Bell said.
"We would expect a deal to help push the US Treasury yields higher -- our range for US Treasury 10-year in the third quarter is 0.55%-0.65% and then moving to 0.65%-0.85% in Q4 --and also sap momentum away from gold prices. We maintain our forecast for gold at $1,790/oz on average in Q3 and Q4."
Swift rebound unlikely
Commerzbank's Fritsch said it was unlikely the gold spot price would rebound swiftly to the highs at the end of last week.
"Yesterday's sell-off caused too much technical damage for this to happen, frightening investors off in the process. This is already indicated by the outflows from ETFs reported by Bloomberg," Fritsch said.
"Outflows from gold ETFs have now been registered for three days in a row. We therefore expect to see a period of consolidation that could well last for several weeks. That would also be a healthy state of affairs following the excessive price surge."
Gold ETFs inflows decreased day on day, with gold ETF holdings on Aug. 12 at 108.7 million oz, down 100,000 oz day on day, with a 336,000 oz fall over the last three days.
TD Securities Global Head of Commodity Strategy Bart Melek said: "Given the technicals and the fundamentals, it would not be surprising to see spot gold trend down to around $1,890/oz, before hitting new records."
Melek said before the yellow metal hits new highs of around $2,100/oz and above, "there will need to be confirmation that the Fed will indeed suppress yields, consider average inflation targeting and there are signs that inflation may move higher."
"At the same time, markets will want to see if monetization of debt is in the cards, before talk of these levels becoming sustained is credible. TD securities projects an average gold price of $2,100/oz in Q4 2021," Melek said.