Gold fell sharply yesterday, breaking below its 50-day and 100-day moving averages and returning toward August’s lows. The move was the third-largest daily decline since the leveraged liquidations at the end of January. The dollar was only marginally higher, and real yields rose modestly during the session.
ZeroHedge’s account of comments from Goldman Sachs precious-metals specialist Adam Gillard points to selling by Chinese traders ahead of a week-long exchange closure. Gillard also cited President Trump’s rejection of Iran’s proposed seven-day truce, pressure from higher rates and weakness across Chinese risk assets. The Shanghai Composite was down as much as 2% intraday.
Gold Broke away below the 50 and 100 DMA yesterday
Higher Real Rates Put Cash in Competition With Gold
Yesterday’s modest yield move followed several weeks of stronger pressure at the front end of the Treasury market. Two-year real yields were back near their highest levels in more than two years, while inflation expectations had risen too little to offset the increase. Holding gold had become more expensive relative to cash. This is the old trope which has merit on days like this, but we’re not buying it long term. That said, a tipping point of sorts can be cited.. But the real culprit was the shanghai spec traders liquidating.
Shanghai Open Interest Falls With Prices
Gold selling was concentrated around the Shanghai open. Aggregate open interest fell by approximately 11,000 contracts, or 2.6%, during the day session. Opening activity was strong, though total volume across the Shanghai Futures Exchange and Shanghai Gold Exchange was not unusually high. Falling prices alongside falling open interest are consistent with traders closing long positions.
Gillard cautioned that the headline figure overstates Chinese speculative length. A large position held long on the Shanghai Gold Exchange and short on the futures exchange inflates futures open interest without representing an equivalent bet on higher prices. Chinese speculators nevertheless remained long, in his assessment.
Traders Face the Holiday Closure
The Shanghai Futures Exchange closes Thursday for National Week and will reopen after Oct. 7. Gillard expects more traders to cut long positions before the shutdown rather than hold gold for a week while developments involving Iran and interest rates can still move prices.
Gold volatility also rose as spot fell. Investors were seeking downside protection in an asset often bought as a hedge, another indication that existing long positions were under pressure. Gillard expects that pressure to bring further selling before Shanghai closes. Gold volatility also rose as spot fell. Investors were seeking…
The SilverTrade Insider publishes market news and interviews with named analysts. Opinions expressed by contributors and interviewees are their own, and they may hold positions in the metals, miners or securities they discuss. Nothing here is investment advice.
SilverTrade is affiliated with SD Bullion, a precious-metals retailer, and SD Depository, a precious-metals storage company. Some contributors hold roles at affiliated companies. See our Editorial Policy.
