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Investors Hunting Liquidity Are Selling Gold to Ride Out Turmoil

Justina Vasquez and Yvonne Yue Li

(Bloomberg) -- As a slump in global markets continues unabated, investors are selling gold to meet liquidity needs by cashing in on the haven’s previous gains.

Bullion tumbled below $1,600 an ounce Thursday, a dramatic U-turn for prices that reached their highest level since 2012 at the start of this week. Indeed, its earlier advance due to its status as a haven during market turmoil may be why gold is being dragged down now.

“Liquidity needs will be a key driver in the short term,” said Suki Cooper, precious metals analyst at Standard Chartered Plc. “Gold is one of the few assets that has outperformed, enabling investors to take profit rather than consolidate losses.”

Margin Calls

Traders say that the unrelenting rout in global equities is triggering margin calls, spurring investors to look for opportunities where they can cash in. Additionally, strength in the dollar is curbing the precious metal’s appeal as a haven for holders of other currencies.

U.S. equities plunged as much as 8.8% Thursday, before paring the drop, after an initial bout of selling triggered a 15-minute NYSE-mandated halt. European stocks tumbled 11% in the biggest rout on record.

The plunge comes after President Donald Trump’s travel ban and tepid fiscal measures failed to assuage concerns over the fallout from the coronavirus. The World Health Organization earlier called the outbreak a pandemic.

The European Central Bank didn’t succeed in stemming the rout after it left rates unchanged, though it temporarily increased its bond buying program and took steps to boost liquidity. The Federal Reserve expanded plans to buy government bonds and alleviate what it called “temporary disruptions” in financing markets.

Spot gold slid 2.6% to $1,591.84 an ounce as of 1:55 p.m. in New York. Prices had hit $1,703.39, the highest level since December 2012, on Monday. Futures for April slumped as much as 5%, before settling down 3.2% at $1,590.30 an ounce on the Comex.

Investor selling of gold, “has everything to do with clearing the books across the board, clearing out all the positions they have and meeting margin calls in equity accounts,” said Josh Graves, senior market strategist at RJ O’Brien & Associates. “What Trump said last night didn’t translate into safe-haven support for gold. That was pretty much the put option and investors didn’t buy.”

--With assistance from Elena Mazneva.

To contact the reporters on this story: Justina Vasquez in New York at jvasquez57@bloomberg.net;Yvonne Yue Li in New York at yli1490@bloomberg.net

To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Pratish Narayanan, Joe Richter

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