The double whammy of Europe's sovereign crisis and a slowing global economy hammered gold and silver prices Thursday.
Gold futures had its largest dollar and percent drop since April 4th, 2012, falling more than $50 per ounce, or 3.11 percent. Silver set a new 52-week low, losing 5.46 percent, down $1.55 per ounce. Meanwhile, the dollar rallied while the euro had its worst day in five months.
Traders said the selling was prompted in part by comments from Fed Chairman Ben Bernanke about the slowing economy.
“Gold has been selling off because of all the anti-inflationary headlines,” says George Gero, RBC Capital Markets Precious Metals Strategist. Historically, gold has been used as a hedge against inflation.
"Fed warning on the economy, weak employment data, weak manufacturing data are all anti-inflationary,” added Gero.
“Everything going on right now is Europe—fear that it will dampen growth,” says Kevin Grady, a trader with Phoenix Futures & Options. The fear of a global slowdown and concerns about stability in the euro zone are causing investors to rush into the relative safety of the U.S. dollar. The run-up in the greenback has been putting pressure on dollar based assets including gold, silver and also, oil.
“Everything is flight to quality—U.S. dollar and Swiss franc but, not gold,” says Grady. But, he also warns that investors shouldn’t necessarily get short the yellow metal. “If there is a currency crisis, you don’t want to be short gold,” noting that any moves out of paper currencies could be fast and furious. “Very dangerous to short gold,” says Grady.
In a recent report, Barclays Capital Management analysts writes that while gold has “failed to differentiate itself as a safe-haven asset” in the short-term, the macro backdrop remains positive.
RBC’s Gero agrees and suggests that investors use this dip in prices to find an entry point into the market. “Every time we have had a sell-off, it’s turned out to be a buying opportunity,” he says.