Why Guns Don't Bring Gold Anymore! The Reasons Behind the Selloff of Gold and Silver

Why a Big Cannon Fire Doesn’t Work for Gold! The Reasons Behind the Selling of Gold and Silver

The decline in precious metal prices from their historical highs has intensified, with gold and silver futures both recording some of the worst single-day drops on record on Thursday. Gold has become the latest “sacrifice” amid rising inflation expectations and the dimming hope of global rate cuts.

Gold prices have fallen for the sixth time in the past seven trading days, dropping $289.20 per ounce on Thursday, a 5.9% decline. Silver futures fell by $8.20 per ounce, with a total decline of about 20% over the seven trading days.

Precious metals are usually seen as safe-haven assets, providing security during times of war, inflation, or other market turmoil. In late January this year, gold prices hit a record closing high of $5,318.40 per ounce. So why have gold prices fallen more than 13% since then?

Here are investors’ views.

Interest Rates

One main reason is: gold has become the latest “sacrifice” amid rising inflation expectations and the dimming hope of global rate cuts.

Typically, when interest rates are low and the opportunity cost of holding gold is also low, gold prices tend to strengthen. Conversely, when interest rates rise, investors tend to sell gold and favor other assets like bonds that offer stable income.

This week, both U.S. and European central banks signaled that the pace of rate cuts might be slower than investors expected. Middle Eastern conflicts and the resulting energy shocks have cast a shadow over inflation and economic growth prospects.

Aakash Doshi, Head of Global Gold and Metals Strategy at State Street Investment Management, said: “Before the war, the money market was expecting the Fed to cut rates twice. Now, the market’s expectation is that there will be no easing policy this year.”

Traders also experienced similar situations in 2022, when Russia’s full invasion of Ukraine caused energy prices to soar, fueling inflation. From April to October of that year, gold prices declined for seven consecutive months.

Retail Investor Enthusiasm Wanes

Over the past year, retail investors poured significant funds into gold ETFs, but now their enthusiasm appears to be cooling.

According to VandaTrack data, Thursday marked the sixth consecutive day retail investors sold the largest gold ETF — SPDR Gold Shares. Based on trading data up to Thursday’s midday, they have net sold about $10.5 million of this ETF during this period.

Compared to last year’s single-day high of $36.8 million in purchases, this figure is relatively small. However, analysts see this trend as a sign that retail interest in gold investment is waning.

“Smart money” also selling

Professional investors are reducing their gold positions. During market turbulence, some trend-following hedge funds, known as Commodity Trading Advisors (CTAs), which use computer algorithms to identify asset price patterns, have been trimming their gold holdings.

Tom Wrobel, Capital Markets Advisor at Société Générale’s Commodities Brokerage, said: “Over the past six months to a year, CTAs have undoubtedly been in an established long-uptrend in gold.” He added that they are “probably still relatively bullish on gold but are managing risk and significantly reducing these positions.”

Suki Cooper, Head of Commodities Research at Standard Chartered, said that given the sharp rise in gold and silver prices over the past two years, some investors might be cashing out to realize profits and offset losses elsewhere in their portfolios, such as margin calls triggered by plunging stock prices. She also mentioned that some investors might be converting to cash due to a strengthening dollar or seeking new attractive investments like energy stocks.

Cooper said: “Liquidity needs in other sectors continue to outweigh the geopolitical risk premium in gold.”

Other Metals Also Declining

It’s not just gold and silver facing sell-offs. Smaller-volume precious metals like platinum and palladium have fallen 17% and 15%, respectively, this month. Industrial metals copper and aluminum have also turned downward — indicating that investors are recalibrating their expectations for global economic growth.

After the conflict erupted at the end of last month and the Strait of Hormuz was effectively blocked, aluminum prices surged to near record highs. Qatar transports aluminum and liquefied natural gas through this strait, with LNG being a crucial fuel for other regions’ production activities. But this week, London aluminum futures fell by 5.7%.

Edward Meir, an analyst at Marex, a commodities trading firm, said: “Investors may be concluding that, once the global economy slows down, demand destruction could occur to some extent.”

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