Factors Behind The Gold And Silver Flash Crash
A highly unusual situation took place in precious metals recently, brought forth by a perfect storm scenario, an abundance of stop losses, and more. It resulted in one of the most volatile moves in the long-standing history of gold and silver – a move that was over in a flash.
The flash crash in metals was enough to shake up even the most bullish goldbugs and silver supporters. However, when you understand the unique factors behind the flash crash in metals, the chances of another recurrence is slim. And, given the way metals have already recovered, it could end up signaling a short-term bottom and restart the gold and silver bull run.
Breaking Down The Gold And Silver Flash Crash
On a recent Sunday evening, precious markets opened globally to a nightmarish situation. Gold markets traded at around $1,800 and then minutes later, in the high $1,600s. Any orders on the books between the $1,700 range were instantly filled while price crashed further, causing a massive cascade of stop losses in a market that moves relatively stable compared to an asset class like cryptocurrency or index trading.
Silver shot down even faster, dropping more than 13% from around $25 to the low $22s. A move of such strength in gold is shocking enough, but the drastic move in silver which has been steadily accumulated for months by the WallStreetBets crowd and other mainstream investors. Silver bars fetch a hefty premium, yet the cost per ounce of gold fell back to lows from a year ago.
The numbers don’t lie. The fall was among the worst metals have seen, but what was the reason for the collapse? According to Marcus Garvey, head of metals strategy at Macquarie Group Ltd, the timing just happened to be right.
Garvey says that holidays in Japan and Singapore contributed to an ultra low liquidity environment which was vulnerable to a strong move. The XAUUSD and XAGUSD trading pairs dropped below a key technical level quickly, and in the process triggered a cascade of stop loss orders which sent price moving even faster. Better than expected job data in the United States also accelerated the issue. Prices were shaved in a flash, but the meltdown across metals was bought up just as quickly.
Technical Support Fallout Leads To Stop Loss Cascade
Although a key technical support level was indeed breached on both major precious metal pairs, support lower has held thus far and a long, V-shaped wick has been left behind on the price charts. The spike closely resembles the V-shape that crypto and stocks experienced on Black Thursday, which resulted in a massive bull market that followed.
After an especially substantial selloff and one that takes out key levels of support, sweeping lows, markets can reach such oversold conditions that they soon reverse. Holding at the current support level could suggest that the downside move, although severe, was a bullish retest that confirmed former trend line resistance as support.
The trend line forms the top portion of a bull flag pattern that could point to prices as high as $2,600 an ounce for gold. Silver’s targets are less clear, but with support holding the WallStreetsBets crew could get the short squeeze they’ve been looking for – something they’ve been successful at in the past.
How Crypto Could Have Contributed To The Fall
Another potential reason for the selloff in metals, which could have exacerbated the cascade of stop losses triggering, was due to more capital from metals flowing into crypto. Much of gold’s downtrend has been due to the emergence of Bitcoin as digital gold and the rest of the crypto market suddenly thriving in the new post-pandemic world.
Nearly risk-free stimulus money has flowed into stocks and crypto. Bitcoin has grown by only a trillion or two, which is peanuts compared to the overall stock market or gold’s $10 trillion and then some cap. At a $10 trillion market cap, each BTC would be worth closer to $500,000.
The allure of how much faster Bitcoin could work against inflation has caused crypto to outperform metals. However, risk appetite will eventually run out and the gold standard will return to prominence.
Although there is no doubt that Bitcoin can do a lot of what gold can do, crypto enthusiasts often forget that gold and silver have near endless industrial use, demand as jewelry, and more, and are among the most trusted and globally respected assets ever. Metals give investors a sense of security that Bitcoin or Ethereum simply cannot.
The Gold Standard, Silver, And Surviving The Storm Ahead
One thing that is for certain is that the world’s economy is facing its most significant shakeup ever. Stimulus money and continued quantitative easing is killing fiat currencies and the dollar, but the gold standard and sterling track record of silver isn’t responding as they usually do, and that could be due to Bitcoin and altcoins.
But even crypto could be in danger if the United States and other super powers follow the lead of China and release a digital currency of their own. Such a situation could lead to bans in Bitcoin and crypto. If that happens, could gold and silver become the only alternative to failing national currencies and continuing to fall under the government’s grasp?
The message here today is that despite the flash crash and ongoing bearish sentiment, the selloff in gold and silver could theoretically be rock bottom for the two shiny stones. And although their reputations have recently been tarnished by the newest financial technology, precious metals should always have a prominent place in any investor or trader’s portfolio.
Platforms such as the award-winning PrimeXBT offer CFD trading of forex, crypto, stock indices, commodities, metals and more all under one roof. The vast variety of trading instruments allows traders to build a portfolio that can survive any situation that’s to come. And with a potential economic shakeup underway, having tools like stop loss orders, built in technical analysis software and more are necessary to regular success.