Yesterday we talked about bearish technical reversal signals in gold, silver– and in Nvidia.
Today we got follow-through in gold and silver. Gold was down more than 5%, silver down more 7%.
As you can see in the chart below, a decline of this magnitude in gold futures has only happened six times in 45 years.
What was happening in these past episodes of extreme gold declines?
In 2013, gold had an 8% drop on a Monday, following a nearly 4% drop the prior Friday, for a worse combined two day loss since 1980. There were reports fiscally troubled Cyprus had agreed to sell a chunk of gold reserves as terms of a bailout. The gold selling was exacerbated when the CME increased margin requirements on gold trading.
In September of 2011, gold was on record highs, and dropped 5.7% and went on to a 13% six day decline. Greece was teetering on the edge of default, the Fed started operation twist (not more QE). With deflationary pressures, the gold selling started, and then came a CME margin requirement hike (in addition to its August margin hike) — more selling.
On October 10th of 2008, gold traded down 7.6%. This was the worst day of a ten day decline of over 30%. This is shortly after the failure of Lehman, and peak liquidation phase.
In June of 2006, gold traded down 7% in a day. A hawkish Fed was curtailing inflation, growth was wobbling and the yield curve inverted. There was a broad rout in the commodities markets.
In 1983, gold was in a three year bear phase. Gold had a down 6% day, on the day Reagan was interviewed, where he dismissed any “quick fix” to recessionary conditions. The theme was high interest rates, to continue the disinflation trend. That means high real rates — and high real rates is a headwind for gold.
In 1980, gold had just had a 25% run over just 12 weeks, trading to a new record high of over $800. Exchanges were tightening margin requirements in precious metals (spurred by the famous silver squeeze). The euphoria turned to liquidation.
A common theme in these rare declines is margin hikes. And we had a margin hike from the CME on this past Friday — setting initial margin to trade gold futures at 27% higher vs. a month ago.