From Friday afternoon to Monday's opening of forex trading alone, the price of gold fell by nearly 7 percent, while silver slumped by 11 percent during the same period. At one point, an ounce of gold was quoted at less than $1,700 and was the cheapest since early April 2021. Currently, both markets are trying to recover from the sharp sell-off.
The sell-off seems to have started with data from the US labor market, which turned out to be better than expected. In July, the number of new jobs increased by 943 thousand (the most in 11 months), and the unemployment rate fell to 5.4%. This could have triggered fears that the Federal Reserve will start reducing its asset purchase program sooner than previously expected, which raised US bond yields (in the region of 1.30% for 10-year bonds), slightly reducing the level of negative real interest rates in the USA.
According to traders quoted by Bloomberg, today's overnight declines in metals prices occurred due to intensive execution of defensive stop-loss market orders. This means that traders who previously held positions in gold futures defended those positions with stop losses, the activation of which caused long positions to be closed, which was expected to trigger a flurry of orders with little market liquidity. This in turn, as it now appears, ended in a sharp sell-off in gold and silver and the appearance of buying opportunities at attractive prices, hence perhaps such a rapid rebound in quotations.
So if the gold and silver market has been cleared of some of its positions, and if downside traders have been given a very good opportunity to execute their trades, then perhaps there could be a significant reversal in prices.
Silver hit its lowest levels since November 2020 at $22.50 per ounce, defending the lows of a correction that began a year ago. However, a potential prerequisite for the above scenario to hold would be the lack of a continuation of price declines and the assumption that such a sharp market-driven discount may have ended a phase in the markets described above.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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