Gold, silver prices are getting clobbered
In heavy volumes, gold suffered its worst trading day of 2017 on Thursday as the metal comes under pressure from a rise in the US dollar and a looming interest rate hike in the US.
Gold for delivery in April, the most active contract on the Comex market in New York with over 24m ounces traded by early afternoon, slumped to a low of $1,231.90, down 1.5% from yesterday's close. Year-to-date the metal is still sporting gains of nearly 7%.
Because gold is not yield-producing and investors have to rely on price appreciation for returns, the metal has a strong inverse correlation to US government bond yields. The metal also usually moves in the opposite direction of the US dollar thanks in part to the growing effect of physically-backed gold ETFs traded in the US. The greenback hit a two month high on Thursday.
In a research note Saxo Bank says gold is facing triple headwinds at the moment. Over and above the dollar and rates, investors' rotation into US equities which have been climbing at a record pace to reach all-time highs this week, is adding further pressure.
Gold's downtrend ahead of the March 15 decision on interest rates from the US Federal Reserve is a familiar pattern says Ole Hansen, head of commodity strategy at the Danish bank, but there is also good news for gold bulls:
The last two times the FOMC raised rates gold reacted negatively in the run-up to the announcement only to rally afterwards. In December 2015, gold lost 2% during the month leading up to the hike, only to rally by 2.6% the following month. The before-and-after reaction to December 2016 was a drop of 5% (Trump's election win playing its part) followed by a 3.4% rally.
With gold breaking support at $1,238 an ounce on Thursday, from a technical perspective the next stop for gold could be $1,219 an ounce.
May silver contracts trading on Comex were smacked down more than 4% to a low of $17.705 in New York compared to Wednesday's $18.489 settlement price. Up to this week silver enjoyed nine straight week of gains – the metal's best weekly run of gains in more than a decade.
Year to date silver is still up 9% and compared to lows hit January 2016, the metal has recovered 29% in value.