Gold and Silver Prices Decline Amid Market Rebalancing
(Bloomberg) — For the second consecutive day, gold and silver prices have dropped as investors prepare for the yearly rebalancing of commodity indexes. This process could involve the sale of billions of dollars in futures contracts over the next few days.
Spot gold fell to below $4,420 an ounce, down nearly 1% from the previous session. Since Thursday, passive funds tracking indices have begun selling precious metals futures to align with new index weightings. Typically, this routine process isn’t particularly noteworthy, but given last year’s significant market rally, it now holds added importance for both gold and silver.
Silver, which saw a more than 3% decline on Thursday, is especially vulnerable to sharp drops due to its recent volatility. According to Citigroup, about $6.8 billion in silver futures might be liquidated to meet the rebalancing requirements, which amounts to approximately 12% of the open interest on Comex.
Citigroup also estimates that outflows from gold futures could reach a similar amount, based on their calculations involving funds tracking both the Bloomberg Commodity Index and the S&P Goldman Sachs Commodity Index. This decline in these metals is deemed necessary, given that their weighting in commodity benchmarks is rapidly increasing.
“I’ve been doing this for years and have never seen flows of this size,” remarked Kenny Hu, a strategist at Citigroup.
While there may be short-term pressure on prices, gold and silver don’t seem poised for a major pullback after experiencing their best annual performance since 1979. Over the past year, both metals achieved multiple records, bolstered by heightened purchases from central banks and strong inflows into bullion-backed exchange-traded funds (ETFs).
As per a statement from the World Gold Council dated January 6, net gold purchases by central banks reached 45 tonnes in November. Additionally, data released on Wednesday revealed that the People’s Bank of China has now extended its gold buying streak to 14 consecutive months, underscoring that public demand remains a crucial factor in supporting bullion.
Rising geopolitical tensions—in particular concerning China-Japan trade relations and the U.S. detention of Venezuelan leader Nicolas Maduro—have also contributed to the support for gold recently, with gold up approximately 3% in the week leading to Wednesday’s close.
Market participants are keeping a close eye on key U.S. economic indicators, including the December jobs report which is set to be released on Friday. A downturn in stocks would likely bolster expectations that the Federal Reserve will further reduce interest rates, potentially benefiting low-yielding precious metals.
Interestingly, silver’s remarkable gain (about 150% last year) has outpaced that of gold. An unprecedented short squeeze impacted the market in October, while fears of potential U.S. import tariffs contributed to the rise of precious metals.
David Wilson, director of commodity strategy at BNP Paribas, noted that while the index rebalancing “could limit upside potential in the short term, it actually enhances long-term momentum for silver.”
As of 1:40 PM Singapore time, gold experienced a 0.7% drop to $4,424.54 per ounce, while silver fell 2.7% to $76.07. Platinum and palladium also extended their losses from the previous session, with the Bloomberg Dollar Spot Index remaining relatively unchanged.
