(Kitco News) – Gold and silver prices took a big hit last week, and the easing of near-term drivers and physical shortages could see the correction last for some time, according to precious metals analysts at Heraeus.
After warning for weeks that gold was extremely overbought, the analysts wrote in their latest precious metals update that the gold rally finally saw a meaningful pullback.
“The gold price suffered its largest one-day percentage decline since 2013, falling by 6.8% from its record high of $4,382/oz to the low on 21 October,” they noted. “This followed a blistering rally that had seen the price rise 66% this year and more than double in 18 months after it broke out to new highs in March 2024.”
The analysts said that retail demand for bullion bars and coins has been strong in many parts of the world. “Now Diwali has passed, the surge in Indian buying is likely to have eased,” they said. “Globally, gold ETFs gained 723 koz in the week of 13 to 17 October, with almost as much being added in just the first two days of last week, including 371 koz on 21 October, as some investors’ enthusiasm remained undimmed even as the price fell.”
Heraeus said that the underlying drivers for gold investment remain intact and after a short correction, the rally could continue if investors continue to add exposure.
“However, as noted in the spotlight two weeks ago, precious metal prices had risen far above their long-term moving averages,” they warned. “Once again, it will ultimately prove to be too far, too fast. It remains to be seen how far the price might fall and how long the correction may last. If the origin of the rally is dated to the end of 2015, then most corrections have lasted for a few months, but the price traded sideways for almost four years after reaching its high in 2020 before breaking out to new highs.”
“The CBOE gold ETF volatility index also hit a more than five-year high last week, with volatility even surpassing the start of the Russia-Ukraine war.”
Gold prices are seeing a steady slide on Monday morning, with the spot price now trading back below $4,000 and hitting a session low of $3,971.44 per ounce at 11:10 am EDT.
Spot gold last traded at $3.987.84 per ounce for a loss of 3.07% on the session.
And silver investors also grew concerned about the severely overextended market for the gray metal.
“Silver fell 6% over the week, with most of the losses concentrated in a single session on Tuesday, when prices dropped by nearly 9%, or $4.50/oz,” the analysts noted. “With no single catalyst behind the event, it appears investors decided not to get too carried away with their optimism. Warning lights had been flashing for some weeks, with prices trading well above their 200-day moving average. The 14-day average true range reached $1.90 during Tuesday’s sharp-sell off, likely triggering a wave of stop-loss orders, fuelling further profit-taking. Despite the sell-off, evidence of dip-buying emerged with net ETF inflows of 13 moz last week.”
The recent market pressures also eased as liquidity conditions improved. “As Diwali came to an end last week and festive buying wound down, some of the heat was taken out the Indian market,” they said. “On the other hand, liquidity in London continued to improve as metal flowed out of COMEX and Asian warehouses, easing short-term borrowing rates and spot premiums. Backwardation of the forward curve continued to moderate, with the nearest contract narrowing to -0.7% to spot by the end of the week.”
“The short squeeze was further eased by 8 moz exiting COMEX warehouses, bringing the total to 33 moz this month, following an extensive period of inflows,” Heraeus noted. “Similarly, silver has been exiting the Shanghai Futures Exchange at a record pace, with 1,495 tonnes of outflows last week, and the largest single day outflow on record observed on Wednesday at 338 tonnes.”
“With the US government shutdown ongoing, the Section 232 review is yet to be concluded which may reverse some of the recent improvements in liquidity conditions,” the analysts cautioned.
Silver prices are also declining on Monday morning after a sharp selloff at the North American open drove the gray metal to a low of $46.094 just after 11 am EDT.
Spot silver last traded at $46.505 per ounce for a gain of 4.44% on the daily chart.
