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Precious metals rebounded on Tuesday following a punishing sell-off that started last week after a blistering rally.
Gold prices rose more than 3 per cent during Asian trading on Tuesday to $4,822 per troy ounce. Silver rose 5.3 per cent to $83.50 a troy ounce.
“People are buying the dip,” said Yuxuan Tang, head of Asia macro strategy at JPMorgan Private Bank. “This is what happens after a 20 per cent drawdown.”
The sell-off in precious metals began on Friday after US President Donald Trump nominated Kevin Warsh to be the next chair of the Federal Reserve, causing gold close 9 per cent lower, its largest single-day drop in more than 40 years.
The nomination of Warsh, seen by investors as a more orthodox choice than other potential candidates, eased concerns about Fed independence as the president wages a campaign to force it to lower borrowing costs. Trump has labelled Fed chair Jay Powell a “stubborn mule” for his refusal to back deeper interest rate cuts.
On Monday, gold prices fell by as much as 10 per cent during Asian trading before paring losses when markets opened in London and New York. Investors and analysts said the steep declines during Asian trading was likely to be a result of heavy borrowing by investors in the region to speculate on rising precious metals prices.
Traders who had borrowed money to take speculative positions on precious metals faced margin calls and were forced to sell assets to raise cash, they said.
Asian markets rallied on Tuesday after the steep fall in gold prices spilled over into the region’s stocks. South Korea’s benchmark Kospi closed 5.3 cent lower on Monday but rose more than 5 per cent on Tuesday.
Friday’s plunge caused CME Group, the world’s largest operator of derivatives exchanges, to raise margin requirements on gold and silver futures. Investors said the higher margin requirements, which mean traders can borrow less on leverage, would have an impact on prices in the short term.
JPMorgan’s Tang said Warsh’s nomination did not have “a fundamental impact on our position on gold”. The bank expects gold to rise to between $6,000 and $6,300 a troy ounce by the end of the year.
The rally in gold, which was initially sparked by greater central bank bullion purchases after Russia’s foreign exchange reserves were frozen following its full-scale invasion of Ukraine, has increasingly been driven by private investors keen to secure a hedge against geopolitical uncertainty and fears of currency debasement by governments in developed markets.
“I think this correction washed a lot of this speculation out,” Tang said. “It helps the market to look back into fundamentals and reassess.”
The US dollar declined 0.2 per cent against a basket of key trading partners, while yields on US Treasuries were steady.
