Gold Loses Momentum After Record as Volatility Roils Silver

(Bloomberg) — Gold’s record-breaking rally showed signs of flagging after futures touched $2,000 an ounce for the first time, as investors assess whether prices rose too high, too fast. Silver fell the most since March.

Both metals retreated after touching fresh highs earlier Tuesday, with gold climbing to a record, as traders looked to lock in profits and the dollar recouped some of its earlier losses. While there’s no end in sight to the economic turmoil unleashed by the coronavirus pandemic and expectations are that more stimulus will be needed to boost growth, investors may seek out more bullish signals before pushing prices higher.

‘That correction was overdue after the massive increase, which culminated overnight,” said Carsten Fritsch, an analyst at Commerzbank AG.

Spot gold fell 0.9% to $1,924.65 an ounce by 9:48 a.m. in London after touching the record $1,981.27 earlier Tuesday. Its 14-day relative strength index has been above 70 for six days, a signal to some traders that it’s overbought and due for a pullback.

“You see the strength wasn’t there,” said Brian Lan, managing director of Singapore-based dealer GoldSilver Central Pte., noting that spot gold’s gains petered out once it reached $1,981 an ounce. “They were trying to try a few more times and a correction is due. So probably you might see some profit-taking already.”

Spot silver fell as much as 9.2%, the most since March, after climbing more than 6% to the highest since 2013. The Bloomberg Dollar Spot Index was little changed, though still near the lowest in almost two years.

While prices wavered on Tuesday, most market watchers are predicting more gains ahead for both gold and silver. There’s a long line of bullish factors buoying markets: the dollar remains weak, geopolitical tensions are rising, real rates have tumbled, and governments and central banks worldwide have unleashed vast stimulus measures to try and boost economies.

“Debasement of the U.S. dollar, the more negative real rates, and you’ve still got lingering uncertainties around geopolitics and the U.S.-China relationship,” said Wayne Gordon, executive director for commodities and foreign exchange at UBS Group AG’s wealth-management unit. “That combination of things is what’s pushing gold harder.”

Fed Meets

This week’s Federal Reserve meeting on July 28-29 may provide more direction for traders. There are some expectations that setbacks in the global fight against the pandemic will push Chairman Jerome Powell to signal that rates will stay near zero for longer.

“The message from the Fed meeting is expected to be dovish, reiterating the need for more fiscal measures, which is likely to be supportive of gold,” said Nicholas Frappell, global general manager at Sydney-based ABC Bullion. “With real interest rates deep in negative territory and the coronavirus resurgence hitting the dollar index hard, that’s good for gold.”

Unrelenting investor demand has helped fuel gains for the precious metals, with inflows into gold-backed exchange traded funds this year already topping the record set in 2009 and silver holdings near an all-time high.

For silver, there’s an added boost from concerns about supply, with the Silver Institute earlier this month forecasting a 7% decline in mine production in 2020. Signs of nascent economic recovery in some countries may also aid demand for the metal used in solar panels and electronics.

Silver tends to perform very strongly when the desire for wealth protection, or fears of inflation-induced wealth destruction, are high and when global economic activity is improving, according to Citigroup Inc. Both these factors are expected to boost prices over the next six to 12 months, driving prices up to $30 by mid-2021 if the bullish momentum continues, said analysts including Aakash Doshi.

“Those people who probably missed out on the gold rally jumped on the silver idea as a similar idea to hedging against the depreciation of the dollar and real interest rates going deeper into negative territory,” said UBS’s Gordon. “Silver has a volatility relative to gold of about double gold’s volatility, so from a hedging, safe-haven perspective, we still prefer gold.”

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