Precious metals are starting to catch their breath after being rocked by a brutal sell-off in the Asian session. Prices fell sharply and then rebounded slightly, as the market gauged whether this was a natural correction after a frenzied rally, or whether a major rally was truly broken.

Spot gold remained under pressure, down around 4% after previously crashing 10% following its sharpest decline in more than a decade on Friday. Silver also hasn't recovered, falling more than 7% after plunging 16% the previous session and posting its biggest intraday drop. The sentiment is clear: from euphoria to risk off in one fell swoop.

The root of the problem is the January rally that "ran too far." Investors piled into gold and silver due to a mix of geopolitical issues, concerns about currency weakness, and central bank independence. Chinese speculators added fuel to the rally and when the trend reversed, the overcrowded market immediately lacked liquidity.

The primary trigger for the sell-off came from news that Donald Trump would nominate Kevin Warsh to lead the Fed. The market read Warsh as a more assertive figure on inflation, thus strengthening expectations for tighter policy, strengthening the dollar, and pressuring dollar priced precious metals. At the same time, speculative flows that had previously been driving prices from Asia reversed, deepening the decline.

The pressure was further compounded by technical factors: many positions were leveraged, so when prices fell, a domino effect occurred margin calls, forced selling, and hedging reversals from the options market. From here, the next direction depends largely on whether physical buyers (especially ahead of Chinese New Year in China) return to aggressively buy the dip, and whether the deleveraging process is truly complete. (alg)[sma]

Source : Newsmaker.id