Key Points
- Gold has suffered its worst one-day drop in over 12 years.
- The sell-off is being driven by “technical selling” after the rally was seen as “overstretched.” Despite the slump, gold is still up about 55% for the year.
- The rally has been fueled by a mix of economic fears, Fed rate cuts, and a weaker dollar.
- Citigroup has now cut its bullish recommendation on gold, expecting the price to consolidate.
Gold prices continued to fall on Wednesday after suffering their worst one-day drop in over 12 years, as a wave of “technical selling” hit the market. The precious metal tumbled as much as 6.3% on Tuesday, a brutal pullback that has brought an abrupt halt to the scorching rally that has been underway since mid-August.
The main reason for the slump, according to analysts, is that the rally had simply gone too far, too fast. “Prices have been trading in overbought territory since the start of September,” said Suki Cooper of Standard Chartered. Technical indicators were flashing warning signs that the price surge, which has seen gold break one record after another this year, was “overstretched.”
Despite the sharp downturn, gold is still up about 55% for the year. The rally has been driven by a long list of worries, from global trade tensions and geopolitical uncertainty to fears about the U.S. budget deficit. The Federal Reserve’s move to cut interest rates has also been a major tailwind for the non-yielding asset.
Retail investors, who had been on the sidelines for much of the rally, have also piled in recently, further fueling the “debasement trade” (the idea of buying hard assets to protect against a falling dollar).
Now, some of the big banks are turning more cautious. Citigroup has cut its “overweight” recommendation on gold, saying the recent price action has “run ahead of the ‘debasement’ story.” They expect the price to consolidate around the $4,000 an ounce level in the coming weeks.
