High-flying gold is hitting some major turbulence as nervousness surrounding U.S. Federal Reserve Board chairman Ben Bernanke's upcoming speech set off a chain reaction of selling that dealt bullion its worst day in 3½ years.
The benchmark gold futures contract on the New York Mercantile Exchange plunged $104 (U.S.), or more than 5 per cent, on Wednesday to $1,757.30 an ounce, reversing all of last week's spectacular gains. It was gold's biggest one-day percentage decline since March, 2008.
The rapid reversal of fortune came after gold had surged to an all-time high of $1,917.90 in intraday trading Tuesday, fuelled by fears over a dramatically slowing economy and unrelenting U.S. and European government debt woes.
"The public was in; the taxi drivers were in; the talk at cocktail parties was of gold and gold and gold again," market veteran Dennis Gartman said in his daily Gartman Letter newsletter Wednesday.
But the investors who had been piling into bullion suddenly blinked as doubts began to grow that Mr. Bernanke's speech Friday to the annual economic policy conference at Jackson Hole, Wyo., would contain any measure that would push investors into gold.
Some observers suggest the strong selloff could signal an end to the gold fever that has gripped the market over the past few months.
"The [gold] trades got more and more crowded … it was just too frothy," said John Kurgan, senior market strategist at commodity trading house MF Global Canada. "Now, everybody's running for the exits at once."
Traders said that investors' loss of nerve snowballed into a major selloff because prices skidded through technical support levels – key points in gold's historical price chart that many traders use to spot changes in the market's trend. The first key technical signal was a so-called "reversal" on Tuesday when gold finished the day in the red after hitting its intraday record high.
The decline in prices below $1,825 an ounce Wednesday morning threw gasoline on the fire. That was a support level where many investors had placed stop-loss orders – standing orders with their brokers to automatically sell if gold falls below the pre-selected price.
Traders said investors who have been buying into the gold rally have increasingly been safeguarding their investments with stop-loss orders so they can get out quickly in the event of a downturn. Each time a new technical support was breached during Wednesday's selling, more stop-loss sell orders kicked in.
As the declines deepened, investors also started getting hit by margin calls – demands from brokers that investors put up more money against the amounts they have borrowed from their brokers to acquire gold. This forced people to liquidate some of their holdings to cover the margin calls, sending gold down further.
After the market close, CME Group, the operator of the Nymex futures exchange, announced a 27-per-cent increase in the margins that buyers are required to put up as collateral when acquiring gold contracts. The move could force more investors to sell and put further downward pressure on gold in days ahead, experts said.
Some market watchers suggested that the sudden and dramatic reversal in gold may be the first hint that gold's increasingly bubble-like rally is about to burst.
But others argued that we may be seeing no more than a temporary setback in gold's rally, as investors take a much-needed breather while they await clarity from Mr. Bernanke.
"There are moments within a bubble where people get shaken out. I think this may be that kind of move," Mr. Kurgan said. "These corrections tend to be sharp, they tend to be vicious. But eventually, [the rally] ends up in firmer hands."