The gold price reached a record intraday high of $US5,608.35 per ounce last Thursday.
Then came the steepest fall in more than a decade during overseas trading sessions on Saturday (Australian time).
The gold price hit an intraday low of $US4,405 per ounce yesterday before rebounding in afternoon trading.
Top to bottom, the gold price tumbled 21% over three days.
Should ordinary investors be freaking out or taking this in their stride?
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What just happened to the gold price?
Analysts at Trading Economics said Saturday's gold price sell-off was triggered by the US President's new Federal Reserve chair pick.
President Donald Trump nominated Kevin Warsh to replace current chair, Jerome Powell, when his term expires in May.
The analysts said Warsh was "viewed as more hawkish than other contenders, raising concerns about tighter monetary policy".
Markets have been concerned over the Fed's independence amid President Trump's persistent public pressure on Powell to cut rates.
Those concerns eased after the more hawkish nominee was announced, prompting a boost for the US dollar.
While the nomination ended months of uncertainty, Warsh was a surprising choice given Trump's preference for lower interest rates.
It was expectations of lower rates, alongside a weakening US dollar and high US debt, that fuelled the remarkable run-up in the gold price last month.
The gold price went from just over US$4,300 per ounce on 31 December to above US$5,600 per ounce last Thursday.
That's a 30% gain in less than a month.
To put that into greater perspective, that's just under half the gain we saw over the entirety of last year for the gold price.
Trading Economics analysts said:
That advance was fuelled by strong central bank demand and the so-called debasement trade, as investors rotated into physical assets from currencies and bonds amid concerns over surging government debt.
The debasement trade refers to investors moving out of paper assets, such as bonds and cash, into real assets, such as gold, silver, and other commodities, because they fear the US dollar will weaken further.
The US dollar's weakness has been driven by concerns over US debt, lower US interest rates and expectations of more to come, and broader economic and geopolitical risks.
This has driven many central banks to diversify into gold, which is seen as the quintessential "safe-haven asset".
Profit-taking and positioning drive 21% rout
While Warsh's nomination was the spark, profit-taking was the fire that led to the gold price plummeting 21% in three days.
Trading Economics analysts said: "Profit-taking also emerged after a relentless rally that had pushed gold to record highs."
In the Australian Financial Review, Aakash Doshi, global head of gold and metals strategy at State Street Investment Management, said the sell-off was also "probably … exacerbated by month-end rebalancing as both short dollar and long precious metals has been the consensus macro trade over the past two to three weeks".
Commodity analysts at French bank Societe Generale SA said the sell-off also represented de-leveraging and positioning.
The analysts said (courtesy Kitco News):
Metal prices didn't just correct on Friday — they deleveraged.
Gold fell 10%, exceeding the largest intraday drop since the 2008 global financial crisis and the biggest daily decline since the early 1980s.
They added:
When positioning gets stretched, stops get hit, margin calls rise, and systematic funds cut risk.
Should you be worried?
AMP head of investment strategy Shane Oliver said the gold price was poised for a correction after such a big run-up.
Oliver said (courtesy abc.net.au):
Gold has been overbought and got ahead of itself.
These rises have been exponential.
It's been vulnerable to a pullback.
Warwick Grigor, an analyst at mining investment specialists Far East Capital, said the fundamentals for gold had not changed.
What has changed in the big picture in a week? Nothing really.
With Trump in office the chaos will continue.
We have just seen over-zealous speculators get carried away and the enthusiasm has been reigned in, appropriately, for the time being.
Movements like this are sent to test our resolve and there will be selling by some, but there but has been no fundamental shift in the
thematic.Silver also took a pounding, falling 26% in [30 January] trading. We need to take this in our stride.
Grigor pointed out that gold miners would still make plenty of money despite the 21% fall in the gold price.
He said implied profitability for gold producers was between US$3,000 and US$4,000 per ounce.
Gold price rebounding now
The gold price began rebounding yesterday and is up 3.45% on Tuesday to US$4,820 per ounce.
Trading Economics analysts said bargain hunting has emerged, and the gold price remains supported by central banks and the debasement trade.
Societe Generale SA is now tipping an increase in the gold price to US$6,000 by year's end, up from their previous prediction of US$5,000.
In a new note, commodity analysts at the bank said (courtesy Kitco News):
… we remain bullish on gold as we believe the fundamental rationale for precious upside remains despite one area of uncertainty being removed – namely, lower Fed institutional chaos.
We always believe a correction can be very healthy.
JP Morgan has a year-end forecast of US$6,300 per ounce for the gold price, with potential to rise toward US$6,600 next year.
JP Morgan analysts said (courtesy wsj.com)
While the dust has yet to fully settle from last week, it has not derailed our structural bullish view on gold.
This long-term rally in gold has not and will not be linear, so for now we once again digest, reset and repeat.
