(Bloomberg) — Gold held losses in a choppy session, a day after suffering the worst rout in years amid concerns its rally had run too far, too fast.
Spot gold fell as much as 2.9% Wednesday before paring some of the losses. That followed Tuesday’s plunge, which saw bullion tumble 6.3% at one point as technical indicators showed this year’s record-breaking rally was likely overstretched.
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At nearly $4,400 an ounce, “that was a bit on the expensive side,” said Darwei Kung, head of commodities and portfolio manager at DWS Group. “It does make sense to see some of really elevated price to come out of the market,” he said, adding that the pullback doesn’t change his long-term bullish view on gold.
The retreat brought an abrupt halt to rapid advances that have been underway since mid-August. The so-called debasement trade, in which investors avoid sovereign debt and currencies to protect themselves from runaway budget deficits, and bets the Federal Reserve will make at least one outsized rate cut by the end of the year have been the primary drivers in recent months. Gold is still up about 55% this year.
“I suspect we’ll find a floor within a few days because the drivers of gold haven’t changed – nothing has changed,” said Adrian Day, who owns his namesake asset management firm in Maryland. “The Fed’s not going to raise rates. The government is not going to fix the budget deficit. I can’t see any fundamental factors that are going to meaningfully change to make people say, well, we don’t need to buy more gold.”
After sitting on the sidelines for much of the early period of gold’s rally, retail investors have taken a bigger role in recent months, in part enthused by the debasement theme. Pictures showing queues of buyers lining up outside bullion retailers went viral on social media. Options volume on the top gold-backed ETFs and futures contracts, a popular way for retail investors to take big bets on the metal’s value, have surged.
US President Donald Trump’s aggressive moves to try and reshape global trade and heightened geopolitical uncertainty have underlined the move higher in precious metals this year. Central banks keen to diversify away from the dollar have kept buying, while there’s also been flows into exchange-traded funds as retail investors tried to get in on the rally.
Citigroup Inc. cut its overweight gold recommendation after Tuesday’s slump, citing concerns about stretched positioning. The bank expects further consolidation around $4,000 an ounce in the coming weeks, strategists including Charlie Massy-Collier said in a note.
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