By Tatyana Shumsky
Gold plunged below $1,800, a dramatic reversal from a record-setting run that bred complacency about the yellow metal's risks.
Gold futures ended the regular session down by $104, or 5.6%, at $1,757.30 an ounce for the most-active contract. A rising stock market and sudden doubts about whether the Federal Reserve would in fact signal any fresh stimulus measures on Friday were the principal drivers behind Wednesday's selloff, analysts noted. The thinly traded front-month contract dropped by the same magnitude to settle at $1,754.10.
But as losses accelerated throughout the day, many investors conceded that it was simply the sentiment that gold had hit a peak, at least in the short term, that pervaded the market. Some had piled into gold over the past two weeks as it notched five consecutive records that culminated in Monday's close of $1,891.90 an ounce on the Comex division of the New York Mercantile Exchange.
"Obviously somebody bought gold close to $1,900 an ounce and they're probably experiencing some buyers' remorse today," said Mark Luschini, chief investment officer at Janney Montgomery Scott, a financial advisory firm that manages $54 billion in client funds.
The world's largest physical-gold exchange-traded fund, SPDR Gold Shares, known by its ticker GLD, appeared to lag behind gold futures' declines Wednesday. But GLD notched steeper losses Tuesday, locking in a 3.8% decline compared with 1.6% seen in the Comex gold futures trading pit because the ETF keeps trading after floor trading ends.
As gold's losses mounted, the GLD saw outflows of 24.84 metric tons of gold by the close of trading Tuesday. This was the largest redemption since Jan. 25, when 31.26 metric tons were sold.
Andrew Strasman, a principal at commodity trading firm Gladius Asset Management in Chicago, said he sold the remainder of his bets on rising gold prices Wednesday after reducing his position once already earlier this week.
Strasman, who uses technical analysis to place bets across commodity markets, said there were increasing signs that the gold trade was becoming "long in the tooth" and susceptible to a move lower.
In recent days, volume has grown, as had the daily trading ranges, which are a "poor man's way to look at volatility," he said, adding that he had concluded that the risk-versus-reward calculation showed that holding on to a long position in gold was no longer in his favor.
"It may not be done, but for me it's done for now," said Strasman, whose firm has $5 million under management. He says the firm has placed bullish bets on gold on-and-off for the past two years. The most recent one was put in place in early July.
Voices calling for a demise to gold's bull run have been drowned out amid the metal's continued surge in the role of a "safe haven" from a variety of factors, ranging from doubts about Europe's ability to manage its sovereign debt to worries that China's economic growth will hit a wall.
Just earlier this week, some analysts were calling for gold to breach the $2,000 mark. In hindsight, such calls were overly optimistic.
"Given the upside we've seen in such a short period of time I'm not surprised to see today's move," said Matt Zeman, head of trading at Kingsview Financial.
"As soon as the market starts to pause it gives people the cue to take profits and take some money off the table," he added. Gold's steep declines and high volumes are an indication that "some larger players" are likely paring their holdings.
But not all investors shed their gold holdings ahead of Wednesday's plunge. The rising likelihood of a recession in the U.S., along with global sovereign debt problems, highlighted by Moody's downgrade of Japan's government credit rating earlier Wednesday, gave pause to John Workman, chief investment strategist at Convergent Wealth Advisors, which has around $15 billion under management.
"We didn't feel a tremendous urgency to have to do something right now," he said.
Workman said many of his clients subscribe to the 3% target allocation to gold, but some still treat gold as "a taboo asset that they fear and don't want in their portfolios."
Luschini says he still recommends that his clients remain in gold, although more as a hedge to other assets in a portfolio rather than for capital appreciation.
For some market participants, gold's dramatic run-up and steep losses are reminiscent of silver's 27% declines notched in early May. At the time, Comex owner CME Group Inc. raised trading deposit requirements, known as margins, by a total 84% over 13 trading days forcing undercapitalized traders to sell their holdings.
The similarity was reinforced Tuesday, when the Shanghai Gold Exchange raised its trading deposit requirements margin requirements to 12%, from 11%, sparking worries that CME Group would follow with a similar move.
"The thing that broke silver's back was CME raising margins and what you saw happen in Shanghai Tuesday [triggered] fears that CME margin requirements will be raised," said Nelson Saiers, chief investment officer at Alphabet Management LLC, which held around 2.2 million shares of GLD as at June 30.
Saiers wouldn't comment on the fund's recent trading activity, but said he wasn't as bullish on gold as some of his peers in recent weeks.
Gold prices reinforced their inverse relationship to benchmark U.S. stock indices, with gold's declines coming as stocks resumed their upward march.
-By Tatyana Shumsky, Dow Jones Newswires; 212-416-3095; tatyana.shumsky@dowjones.com
--Jerry A. DiColo contributed to this article.
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