A dramatic sell-off in gold and silver in response to the appointment of Kevin Warsh as the next US Federal Reserve chairman has seen mining and commodities funds tumble after their breath-taking run of the past year.
On Friday gold dropped almost 10% to $4,850 an ounce, its largest intraday drop since the 2008 financial crisis, having hit a record of nearly $5,600 on Thursday.
Silver plunged as much as 30%, its biggest single day fall, after President Trump surprised the market by selecting the comparatively hawkish Warsh, a former Federal Reserve governor. From $121 on Thursday, silver fell to $83.81 an ounce.
The precious metals had soared on fears that Trump would nominate a pliable candidate who would compromise the central bank’s independence and give him the interest rate cuts he wants.
By contrast, Warsh, who Krishna Guha, head of central bank strategy at Evercore ISI, said was “a pragmatist, not an ideological hawk”, has argued for higher interest rates in the past and defended the Fed’s independence.
Market commentators also pointed to derivatives exchange operator CME which hiked margins on gold and silver futures, forcing some traders to close positions if they did not have the capital to put up more collateral.
With mining shares retreating as gold and silver speculation suddenly subsided, investment companies in the Commodities and Natural Resources sector unwound some of their recent spectacular rises, losing this year’s gains.
Golden Prospect Precious Metals (GPM) fell 8.7% on Friday with another 6.6% decline today to 92.5p as gold slid to an intraday low of $4,403 an ounce, down 21% since Thursday.
“Silver has fallen by more, down 32% since its year-to-date high less than a week ago. Copper and oil also fell in value,” said AJ Bell investment director Russ Mould.
Despite the sudden reversal, shares in GPM, a £92m closed-end fund run by Keith Watson and Robert Crayfourd at Manulife, have soared 138.6% in the past year at last week’s close. Last year it was the best performing UK investment company with a total shareholder return of 165%.
That indicates how undervalued miners, particularly smaller ones, had become, and also how, as leveraged plays on underlying commodities they can at times rise faster, and conversely fall more quickly, than the precious metals they produce.
After Friday’s fall, gold was still 73% higher than a year ago. We looked at its prospects last September when in sterling terms it had advanced 29% year to date.
Similarly, BlackRock World Mining (BRWM), the £1.7bn giant of the sector, dropped 8.7% on Friday with another 6.6% so far today leaving it at 862p. As of Friday the investment trust had generated a total return of 91.8% to shareholders over one year.
CQS Natural Resources Growth & Income (CYN), also run by the Manulife team, shed 8% on Friday, leaving it up 121% over 12 months, before sliding another 9.7% to 353p on Monday.
Baker Steel Resources Trust (BSRT), gave up 7% on Friday, leaving the £103m investment company with a 71.7% shareholder return over one year.
Geiger Counter (GCL), an £85m listed uranium fund also run by the Golden Prospect managers, has fallen 8.4% in the past two days. As of Friday it had provided a 57.9% total shareholder return over one year.
Last Wednesday, as gold started to slip, Neil Wilson, investor strategist at Saxo UK, warned that the precious metals run had “all the hallmarks of a speculative squeeze that is increasingly disorderly, volatile and dangerous”.
Meanwhile, cryptocurrency Bitcoin has seen its entire Trump-era gains wiped out after a sell-off over the weekend saw it trade around $77,000 after surging to almost $125,000 late last year in response to a series of helpful measures by Trump.
