Gold, Silver Snap Back From 'Oversold' Territory After Swiss Referendum
London (Dec 1) The metals fell sharply during overnight trading after Swiss voters resoundingly rejected a referendum that would have required their central bank to more than double its gold holdings. Silver hit a five-year low.
But hours later, both have roared back into positive territory for the day on ideas that the initial weakness was “overdone,” with short covering setting in and physical buyers scooping up metal at bargain prices. The rally got an extra lift from news that Moody’s downgraded Japan’s credit rating.
In overnight screen trading, gold for February delivery traded as low as $1,141.70 an ounce overnight, which was a loss of $33.80 from Friday’s pit close. However, as of 9:20 a.m. EST Monday, the metal was $5.40 higher for the day to $1,180.90 an ounce.
March silver fell as far as $14.155 an ounce, which at the time was a loss of $1.401 an ounce. On a futures continuation chart, this was the lowest level since August 2009. However, since the metal has shot back higher all the way to $15.90, a gain of 34.4 cents for the day.
Going into the weekend, analysts had suggested gold might sell off if the Swiss measure failed, but did not look for the weakness to be lasting since it was already expected, based on media polls. The greater move might have been strength should there have been an unexpected “yes” vote, they said.
The precious metals went out on a weak note in after-hours electronic trading Friday on sympathy selling with crude oil. Then results of a Swiss gold referendum on Sunday showed that 77% of the populace voted against the measure, a far more one-sided result than pre-election polls had suggested.
Had it passed, the Swiss National Bank would had to have bought enough gold so that 20% of its reserves were in the precious metal. Analysts had estimated this would have meant 1,500 or more metric tons would have to be bought, compared to current holdings of 1,040.
Failure of the measure may have emboldened bearish traders to re-establish short positions, analysts said. Gold hit a three-week low, while the decline in silver carried to a five-year low as “stops after stops” were triggered, said Afshin Nabavi, head of trading with MKS (Switzerland) SA. These are pre-placed orders activated when certain chart points are hit.
But prices turned around just as dramatically as they fell.
“Down there, there were quite a few physical bargain hunters that came in,” Nabavi said. “Therefore, there was some short covering early in the European time zone.”
Short covering is when traders who have gone short, or taken out bearish bets, now buy to exit positions.
“You had a heavy sell-off on the Swiss vote. I think things were overdone and you have buying back here,” said Tommy Capalbo, precious-metals broker with Newedge, citing short covering and profit-taking by shorts.
Phil Flynn, senior market strategist with Price Futures Group, said even though gold reacted negatively to the Swiss vote, the market was not expecting the measure to pass anyway.
“With the weak economic data we’re seeing across the globe right now, I think there is an expectation that we’re going to see more stimulus in China and everywhere else,” he said. “So I think the market got a sense that we over-reacted to the downside.”
Traders offered a mixed assessment of how much a Moody’s downgrade of Japan impacted the gold market. Some downplayed this, but Flynn said it likely added to the buying.
“When you get a downgrade like that, fears of default kind of ring in your head. You go back to the old safe-haven play,” he said. “So I do think the Japanese downgrade definitely played into the rebound.”