The whole ‘stairs up, elevator down’ adage doesn’t feel quite right for the metals complex right now. In fact, it was more a case of ‘elevator up, elevator down’.
Certainly, the rather dramatic moves that we’ve seen across the precious metals space over the last couple of trading sessions emphasise the dramatic nature of the pullback from record highs printed early on Thursday. Spot gold, for instance, has slumped 12% since then to trade back beneath $5,000/oz, while spot silver has tumbled over 20% in the space of two days, breaking back below $100/oz.
In many ways, moves of this ilk shouldn’t be surprising – and, that’s not something that we can say simply with the benefit of hindsight. For some time now, it’s been clear that conditions in the metals market were incredibly frothy, while signs emerged earlier this week that things were becoming downright disorderly. Thursday’s APAC session was when this seemed to come to a head, as an apparent gamma squeeze forced dealers to buy spot as a hedge to ensure calls they’d sold remained delta-neutral, thus forcing price to those record highs at $5,600/oz in gold, and above $120/oz in silver.
Added to which, positioning was clearly incredibly crowded on the long side, while volatility had increased to frankly preposterous levels – at one stage silver overnight implieds were trading as high as 160%! In a market with vols at such a level, and with leveraged longs so stretched, it doesn’t take much to trigger moves of the ilk that we’ve seen today – put simply, every man and his dog rushing for the exit at the same time, forcing price lower, which in turn begets further forced selling, serving as a useful reminder that momentum works both ways!
At the same time, with price falling so violently, participants have taken a collective view that attempting to ‘catch a falling knife’ is unwise, meaning that offers have been pulled out of the market, in turn considerably thinning liquidity, widening spreads to a notable extent, and further exacerbating the selling pressure that was already being seen.
Obviously, the million dollar question is where metals now head next.
Calling that with a high degree of conviction, at this stage, is something of a fool’s errand, given the whippy and choppy nature of price action. That said, closes above $5,000/oz in gold and $100/oz in silver might well give the bulls some degree of hope that the ship may well be starting to steady just a little.
To be clear, the fundamental bull case for both gold and silver is still a very solid one – reserve demand is healthy, retail demand hasn’t gone away, while those seeking an effective geopolitical hedge will still largely flock to the precious metals complex as opposed to the USD or USTs.
For markets, in the here and now, the key question is hence when fundamentals will take over from price as the primary driver once again? That, in turn, will determine when may be an opportune moment for dip buyers to step in.
