Gold Plunges As Global Equity Mayhem Sets Traders On Edge

(Bloomberg) -- Gold plunged on Monday as traders assessed the implications of a major global stock rout.

Spot bullion fell as much as 3.2%, the biggest single day drop since early June. Other precious metals have also fallen sharply, with silver down by as much as 7.2%.

“Margin calls ahead of the New York opening have forced traders to liquidate winning positions in gold to cover their losses on stocks,” said Adrian Ash, director of research at BullionVault, a trading platform for precious metals. In a stock-market crash it’s common for gold to drop as equities plunge, “but it falls less and from higher ground before finding its floor sooner,” he added.

Despite Monday’s sharp drop, gold is still up by about 15% so far this year. It hit an all-time high in July, aided by central-bank buying and Asian consumers.

Expectations of rate cuts by the US central bank have also increased, a positive for the non-interest-yielding yellow metal. Rising geopolitical tensions in the Middle East — Israel is bracing for a possible attack from Iran and regional militias — should also support the safe-haven asset.

But those bullish factors were overshadowed on Monday by pressure on positions from the global stock market selloff.

“Virtually every time there is marked equities weakness, investors who hold gold as a risk hedge will liquidate part of their holdings to raise liquidity against any potential margin calls,” said Rhona O’Connell, an analyst at StoneX Financial. “When the dust settles, they almost invariably buy it back.” 

Spot gold was down 2.2% at $2,388.63 an ounce by 2:13 p.m. in London. The Bloomberg Dollar Spot Index slipped, while US 10-year Treasury yields fell sharply. Silver, platinum and palladium all dropped.

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