Gold and silver experienced their sharpest sell-offs in years as investors locked in profits amid concerns that the precious metals' recent historic rally has overvalued them.

Spot gold prices plunged 6.3%, their biggest drop since 2013, while spot silver fell 8.7% to $47.89 an ounce after technical indicators suggested the previous rally may have been overdone.

Traders also cited a stronger dollar as reducing the metals' appeal, while recent comments from the White House eased concerns about the US-China trade talks. The closure of India, the second-largest gold buyer, for the Diwali festival has also significantly drained market liquidity.

Trend followers and precious metals traders are "taking profits after a very strong rally," said Bart Melek, global head of commodity strategies at TD Securities. He added that technical indicators for the gold market suggest the recent price increase is historically unsustainable and vulnerable to a pullback.

The decline abruptly halted a surge that had seen both metals reach record highs over the past week. Gold surged largely on bets that the US Federal Reserve would make at least one significant interest rate cut by the end of the year, as well as the so-called debasement trade, in which some investors have withdrawn from sovereign debt and currencies to protect themselves from runaway budget deficits.

In the silver market—which, unlike gold, is not just a store of wealth but a metal with industrial utility—the rally in recent weeks has been even more dramatic.

A short squeeze in the London silver market last week pushed prices past the record set in 1980, during the Hunt brothers' infamous attempt to monopolize the market. The benchmark price traded above the New York futures price, prompting traders to ship the metal to the British capital to ease the squeeze. On Tuesday, silver in vaults linked to the Shanghai Futures Exchange experienced its biggest one-day outflow since February, while stocks in New York also fell.

With the ongoing US government shutdown, commodity traders have also lost one of their most valuable tools: the weekly report from the Commodity Futures Trading Commission, which shows how hedge funds and other money managers are positioned in US gold and silver futures. Without such data, speculators may be more inclined to build very large positions one way or another.

"The absence of positioning data comes at a difficult time, with the potential buildup of speculative long exposure in both metals making them more vulnerable to a correction," said Ole Hansen, commodity strategist at Saxo Bank US.

Gold fell 5.5% to $4,118.07 an ounce at 12:27 p.m. in New York. Silver traded 7.0% lower at $48.79 an ounce.

Volatility in precious metals has spiked in recent days, with traders seeking to protect themselves from potential price declines in other parts of their portfolios or to profit from them.

More than 2 million options contracts tied to the world's largest gold-backed exchange-traded fund (ETF) were traded on Thursday and Friday of last week, surpassing the previous record. (alg)

Source: Bloomberg