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Why Are Gold And Associated ETFs Selling Off?

Ian Young

This article was originally published on ETFTrends.com.

Gold markets and gold ETFs are down more than 3% today as investors scramble to pull funds from a plethora of markets, to cover mounting losses in stocks, as fear of the coronavirus contagion grips the globe.

Along with the selloff in the stock markets, gold prices have seen heavy selling pressure in Friday's session, with the lustrous metal trading around $1,588/oz, down nearly 3.5% and having broken through the $1600 key level.

The SPDR Gold Trust (GLD) is off 3.25% Friday, while the VelocityShares 3x Long Gold ETN (UGLD) is down almost 10%, tracking losses in the precious metal, as investors take profits gold and scramble to cover stock losses.

The geopolitical menace that is the coronavirus and accompanying risk-averse sentiment would normally drive gold prices higher, as investors seek safe-haven assets. But it’s possible that the selloff in precious metals was triggered by traders looking to take profits after gold's substantial run lately, as well as cover stock losses.

“It’s bloodshed,” Commerzbank AG analyst Carsten Fritsch said by phone Friday. “It first started with forced selling from equity investors who also sold their gold positions to cover their losses in equities and also to cover margin calls. Gold investors don’t want to sell but are forced to cover the losses in other asset classes.”

As the global asset sell-off heats up, investors could be dumping gold to cover margin calls. The shin metal also tanked  as concern mounted over how the coronavirus outbreak will upset demand in China for everything from crude to copper to gold. China is among the biggest consumers of bullion.

“The possibility that China may be using less is hurting commodity accounts and therefore you’re going to see margin calls,” George Gero, a managing director at RBC Wealth Management, said by phone Friday.

Economic data may also be affecting gold prices. While it is still indicating a contraction, measure of business conditions published on Friday show that business conditions have improved from 42.9 to 49 in February. Any reading below 50 indicates contraction, and the Chicago PMI has now contracted for six months in a row.

Still, with all the panic of the coronavirus and economic and geopolitical turmoil, it is predicted that the Federal Reserve will cut rates again this year, which is positive for gold.

“We think that there will be opportunities to continue to add to long exposure,” Cooper said in a Bloomberg TV interview. “You might see a little bit of a sell-off, so there might be better entry levels. But beyond that, we think that upside risks still linger for gold.”

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