(Kitco News) - Investors looking for reasons why gold and silver saw their biggest one-day drop in years don’t need to go down any conspiracy-theory rabbit holes. According to one analyst, their unprecedented gains are reason enough.
In her latest note, Nicky Shiels, Head of Research and Metals Strategy at MKS PAMP, pointed out that it took the gold market only 30 weeks to rally from $3,000 to $4,000 an ounce.
“Previous $1,000 cycles took more than 10 times longer (between ~240 and ~650 weeks),” she said. “Prices are in the stratosphere, the rally is maturing, and any irrational market can fall on ‘no reason.’”
As for how unprecedented Tuesday’s selloff was, Shiels noted that SPDR Gold Shares (NYSE: GLD) saw a four-standard-deviation drop in its price—an event with a probability of occurring once every 63 years.
Although gold continues to face some follow-through technical selling, the market appears to be holding initial support above $4,000 an ounce. Spot gold last traded at $4,030 an ounce, down more than 2% on the day.
Shiels said that, given Tuesday’s price action, it could take longer than expected for the precious metals to find their footing again. She added that it’s too soon to tell whether this is a market crash or a short-term correction.
She noted that in previous selloffs, both gold and silver have benefited from investor “buy-the-dip” sentiment; however, the game has changed with prices at $4,000.
“Gold’s now not a sub-20 vol asset but a ~30 vol asset, which is a headwind for potential ‘wealth preservation’ flows,” she said. “Expect tighter risk parameters going forward, which is liquidity-constraining.”
Despite the significant market uncertainty, Shiels said she would like to see gold consolidate between $4,000 and $4,500 an ounce in the near term.
“The post–Liberation Day consolidation period ($3,100–3,400 range for five months over the summer) is something gold and silver prices should aspire to in the short term: a range-bound period of $4,000–4,500/oz (the ‘new $3,100–3,400’) and $45–$50/oz (the ‘new $35–40/oz’), allowing markets to breathe, liquidity and risk appetite to return, and fair-value fundamental floors to be secured,” she said.
