Gold prices rose for the second consecutive day, rebounding to reach the $5,000 per ounce mark after the precious metal's sharp collapse from its historical highs, attracting bargain hunters. Driven by the rebound in market risk appetite and the weakening of the US dollar, gold spot prices rose as much as 2.9% on Wednesday, after rising by more than 6% in the previous trading day. The current gold price is about 10% lower than the historical high reached on January 29, but the cumulative increase during the year is still about 17%, and silver is rising simultaneously.
Daniel Ghali, senior commodities strategist at TD Securities, said in a report: "The passive selling of precious metals may be coming to an end. The violent fluctuations last week will inevitably make retail investors take a wait-and-see attitude, which will lose an increasing proportion of buyer power."
Precious metal prices surged last month, with the rally underpinned by a combination of speculative momentum, geopolitical turmoil and concerns about the Federal Reserve's independence. But market watchers had previously warned that the rally was going too big and too fast. Late last week, the rally in precious metals suddenly came to an abrupt end, with silver recording its largest single-day decline in history and gold also experiencing its largest single-day decline since 2013.
Previously, Chinese funds and Western retail investors had massively increased their holdings of precious metals, while investors poured into leveraged open-end index funds and a wave of call option buying, further boosting price increases. Precious metal prices suddenly collapsed during the Asian trading session last Friday, and the decline continued into the beginning of this week.
According to data compiled by Bloomberg, the four largest gold ETFs in mainland China had a combined outflow of nearly US$1 billion on Tuesday, setting a record single-day outflow in history and reflecting that investor confidence has suffered a heavy blow. Just last week, these ETFs recorded record inflows.
However, investors and analysts believe that the fundamental factors that drove gold to record highs remain unchanged. George Efstathopoulos, portfolio manager of Fidelity Fund, said that the fund reduced some of its holdings in gold a few days before the plunge and is now waiting for the opportunity to enter the market again.
Many banks are optimistic about the rebound in gold prices. Deutsche Bank stated on Monday that it will maintain its expectation that gold will rise to $6,000 per ounce. Goldman Sachs Group analysts Lina Thomas and Daan Struyven said in a report that there are "significant upside risks" to their year-end gold price forecast of $5,400.
Bank of America noted that precious metals volatility will remain elevated. Niklas Westermark, head of commodity trading in Europe, the Middle East and Africa at the bank, said that gold’s medium- and long-term investment logic is more solid than silver. He said that although high prices and market turmoil may affect the size of positions, they will not weaken overall investor interest.
Gold prices also continued to receive support from geopolitical tensions, which escalated further after the U.S. Navy shot down an Iranian drone. However, US President Donald Trump reiterated that the two countries were engaged in diplomatic negotiations.