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Traders cautious for now about buying dip in gold prices after huge drop

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(Kitco News) - Market participants are being cautious about buying into another huge price dip in gold Monday, as the metal once again tumbled with traders continuing to exit precious metals alongside other markets.

Still, some observers said low interest rates around the world are likely to ultimately make the precious metal “attractive” to investors.

Gold initially soared Sunday night when the Federal Reserve slashed interest rates in another emergency announcement instead of waiting for a policy meeting that had been scheduled for Wednesday. Policymakers slashed their benchmark interest rate by 100 basis points to a range of zero to 0.25% and also launched a bond-buying program of at least $700 billion, known as quantitative easing.

Other countries announced measures as well. Still, U.S. stock-index futures hit a 5% limit-down move overnight, and stock bourses fell around the world, with shares in Europe hitting their weakest levels since 2012.

As other markets went into a nosedive, gold turned south as well. As of 8:50 a.m. EST, Comex April gold was $57.50 lower to $1,459.20 an ounce, while May silver was down $2.205 to $12.285.

TD Securities, in a research note, said bullish gold positions continue to be liquidated aggressively amid rebalancing and margin calls. A number of analysts have said traders need to raise money to offset damage in other markets.

“A lot of people are getting out [of gold], needing to have cash,” said Afshin Nabavi, head of trading with MKS. “There is a lot of liquidation going on. There is not enough liquidity to buy it.”

Traders are shying away from even participating in the market at the moment, he continued.

“We need to wait until things cool off a little bit,” Nabavi said. He later added, “Things could go much lower from here.”

Phil Flynn, senior market analyst with at Price Futures Group, said people are unsettled about all markets right now due to the limit-down move in stock-index futures. The latter causes overnight electronic trading to close until Wall Street opens.

“If there is any support coming into the [stock] market, there might be a bid [in gold]. But right now, people are running scared, so they’re afraid to step in,” Flynn said.

Flynn said another factor hurting gold is fears of disinflation as a result of the COVID-19 outbreak hurting the global economy. And, he said, there is some speculation in the market that maybe central banks will have to sell some of their gold reserves to support their economies.

Meanwhile, Nabavi pointed out that gold broke below technical-chart support levels not seen in a long time, exacerbating the selling. When this occurs, sell stops are typically triggered. These are pre-placed orders activated when certain chart points are hit.

“We have broken pretty much every single support point,” Nabavi said. “It’s not a normal market.”

TD Securities pointed out that recent sell-offs in gold along with stocks are deja vu.

“The current gold-market sell-off is similar to what happened during the financial crisis [in 2008], when prices dropped for a period of over three months along with collapsing equity valuations, as increased volatility and margin calls forced levered investors to sell to provide liquidity,” TDS said.

“While the uncertainty surrounding the virus is likely to keep volatility and liquidation risks high, the pending historic low real/nominal interest rates, liquidity injections, quantitative easing and income-support programs should reduce volatility and drive capital into gold once again when the dust settles.”

In another research note late Friday, TDS offered more detail on what happened to gold when the global financial crisis hit in 2008.

“Back then, prices fell from a high of $987.71/oz in July to $682.57/oz in October, as levered investors were forced to sell to provide liquidity to cover margin calls and provide liquidity across portfolios broadly. In addition to liquidity-driven selling, it seems to us that the yellow metal was also sold in response a massive jump in gold volatility, which spiked from just above 10 to over 26 as the VIX also spiked,” TDS said.

Spikes in volatility can lead to decreases in positioning, since commodity trading advisers and systematic funds have grown to represent the bulk of commodity trading, said the Canadian firm.

“Indeed CTAs can cut long exposure when vols spike, even if momentum, monetary and other fundamentals continue to point to increasing length,” TDS said.

Commerzbank analyst Daniel Briesemann commented that recent selling in gold has spilled over into exchange-traded funds. He cited Bloomberg data showing that these holdings registered outflows of 17 metric tons when prices fell on Friday, their biggest daily outflow since December 2016.

“Gold showed a similar pattern during the 2008 financial crisis, though at that time gold recovered relatively quickly again after its sharp fall,” Briesemann said. “The current rate cuts and other monetary policy loosening measures being taken by many central banks should make gold attractive.”

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