Precious metals are being hit hard Wednesday—gold, silver, platinum and palladium all caught in the wave of selling.
The main reason traders cite for the sell-off is the weaker euro and stronger dollar, making dollar denominated metals more expensive to own. But, there are other factors at play here as well.
After a less than stellar year traders say hedge funds are seeing redemptions. “Everybody wants cash, liquidity is thin” says Bruce Dunn, Auramet Trading Senior Vice President.
Metals have “broken all the levels” and it’s a kind of “get me out” mentality playing out in the markets right now.
Banks are also looking to metal inventories for cash through lending gold on swap agreements with other banks. Normally, banks with gold can usually borrow dollars against their gold holdings for less than they can borrow dollars outright. That is not the case right now.
Traders say banks are lending gold (i.e. borrowing dollars) at a premium to dollars rates and this causes a negative lease rate, an unusual situation which implies underlying concerns about counterparty risk in the system. “I can’t lend—platinum, palladium, rhodium—even silver is getting to full carry,” says Dunn.
“Gold is in a grave technical position,” writes Richard Ross, Auerbach Grayson Global Technical Analyst. “We are currently trading below the 200 day moving average for the first time since January of 2009; a span of almost 3 years.”
Gold's Technical Breakdown:
“The 50 week moving average at $1574 should provide support on the way down, but a break below that level should have everyone on the sidelines. Absent a reversal of fortune today, any close below $1,604 should be viewed as a strong confirmed sell signal. Given the potential for further liquidation by hedge funds, institutions and retail investors, gold cannot be owned below $1,604,” says Ross.
Traders also say recently higher gold prices had been hurting demand from countries where there is normally strong physical demand including India and China.