Gold Prices Tumble Amid Reports of Margin Calls

February 28, 2020

New York (Feb 28)  Gold prices fell to their lowest level in 10 days on Friday as portfolio investors appeared to liquidate positions in favor of cash and bonds, as the flight from risky assets worldwide continued at breakneck pace.

By 1100 AM ET (1600 GMT), gold futures for delivery on the Comex exchange were down 3.5% at $1,585.70, while spot gold was down 3.5% at $1,584.40.

Silver futures also tumbled, losing 5.9% to $16.62 an ounce, their lowest since early December, while platinum slid 4.9% to $860.85 an ounce.

Various reports suggested that investors’ losses on equities had become so severe in the course of the week that they were being forced to sell their precious metal holdings to meet margin calls.

For months, end-users of gold such as central banks and jewellers have been scaling back their purchases as portfolio inflows drove prices up to record highs (including a new all-time high in euro-denominated terms).

That has left the market at the mercy of hot money, ABN Amro Georgette Boele wrote in a weekly note on Friday.

“For around six months now, gold is a crowded trade,” she argued. “Investor positions are around 80% of the annual supply (mine supply and recycling) and could come to market at any time when investors change their minds.”

Boele warned that further selling may be ahead if the current bout of risk-aversion gets any more intense.

“If risk aversion were to result in a market panic, investors will find cash and very liquid assets attractive. They will probably liquidate gold investment positions,” Boele said.

Gold has radically decoupled from bond yields this week: the Fed-sensitive 2-Year Treasury yield collapsed to 0.91% on Friday from 1.38% a week earlier, while the 10-year Treasury yield tumbled to a record low of 1.15% on Friday before bouncing weakly.

Such yields reflect expectations that the Fed will cut interest rates by three times or more over the next couple of years, even though many economists argue that the economic effect of the virus is chiefly a supply shock – something to which central banks should not normally react.

St. Louis Fed President James Bullard said earlier Friday that a rate cut still isn’t the Fed’s “base scenario”, although that could change depending on the economic impact in the U.S. – essentially the position laid out in Congress by Fed Chairman Jerome Powell earlier this month.

Nordea analyst Morten Lund pointed out that the window for flagging a policy change is fast closing, as the blackout period ahead of the next Federal Open Markets Committee meeting begins at the end of next week. Neither Powell nor Vice Chairman Richard Clarida is scheduled to speak before then, Lund noted.

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