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

Source: International Investment Bank Research Report

Why did the big guns lose their power when gold and silver prices plummeted? The reasons behind the sell-off in precious metals

The decline from 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 dwindling hope for 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 $8.2 per ounce, with a total decline of about 20% over the seven trading days.

Precious metals are typically seen as safe-haven assets, providing security during times of war, inflation, or market turmoil. In late January, 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’ perspectives.

Interest Rates

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

Generally, 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 the US 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 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 through Thursday’s midday, they have net sold about $10.5 million of this ETF during that 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 Advisory Director at Société Générale’s commodities brokerage division, 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 their 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 their holdings into cash due to a strengthening dollar or shifting into recently attractive sectors like energy stocks.

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

Other Metals Also Declining

The sell-off isn’t limited to gold and silver. Less-traded metals like platinum and palladium have fallen 17% and 15%, respectively, this month. Industrial metals like copper and aluminum have also declined — indicating that investors are recalibrating their expectations for global economic growth.

At the end of last month, after the outbreak of conflict and the blockade of the Strait of Hormuz, aluminum prices surged to near record highs. Qatar transports aluminum and liquefied natural gas through this strait, with LNG being a vital 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 demand destruction could occur once the global economy slows down to some extent.”

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