Trusted gold and silver, only to see a 60% plunge in a day… retail investors betting on precious-metals products 'scream'

A betrayal by the once-surging 'safe haven'

Gold and silver prices plunge in tandem

Silver leveraged ETNs fall across the board

Retail investors net-bought ₩1.4 trillion of ETFs in a month

Losses likely to grow amid high volatility

Brokerages see it as a 'temporary correction'

As gold and silver prices, which had been on a tear, plunged vertically, related exchange-traded notes (ETNs) tumbled by as much as nearly 60% in a single day. The precious-metals market showed signs of a 'seizure' on speculation that Kevin Warsh, the U.S. Federal Reserve (Fed) chair nominee, would slow the pace of rate cuts. Massive losses now appear inevitable for retail investors who recently bet on rising gold and silver prices.

◇ Silver leverage: down 60% in a day

According to the Korea Exchange on the 2nd, products that aggressively bet on gains in gold and silver prices fell across the board.

The 'Mirae Asset Leveraged Silver Futures ETN B' and 'KB S&P Leveraged Silver Futures ETN(H)', which track the gold and silver price gain at twice the rate, plunged about 60% in a day, wiping out more than half of investors’ principal. 'Samsung Silver Futures ETN(H)' and the 'Korea Investment & Securities Silver Futures ETN' also fell by about 30%. Leveraged gold ETNs dropped more than 20%. 'Meritz Leveraged Gold Futures ETN(H)' fell 26.36%, while 'KB Leveraged Gold Futures ETN(H)' slid 25.64%.

In the exchange-traded fund (ETF) market as well, precious-metals products posted the worst performance. Excluding leveraged and inverse products, nine of the top 10 decliners were gold- and silver-related. The biggest dropper was 'KODEX Silver Futures(H)', which fell 30% in a single day. 'TIGER Gold & Silver Futures(H)'(-15.49%), 'TIGER Gold Futures(H)'(-13.27%), 'KODEX Gold Futures(H)(-12.92%), 'TIGER KRX Physical Gold'(-12.82%), and 'ACE KRX Physical Gold'(-12.81%) also plunged. 'HANARO Global Gold Mining Companies', which invests in gold miners such as Newmont and Agnico Eagle Mines, fell 13.83% to rank fourth in terms of decline.

Retail investors, who had been the most aggressive buyers of gold and silver-related products, suffered heavy losses. Over the past month, individuals net-bought a total of ₩1.4570 trillion worth of related ETFs. In particular, ₩836.3 billion in lump-sum money flowed into the highly volatile 'KODEX Silver Futures(H)' during the period. More than ₩460.0 billion of retail funds also flowed net into physical-gold ETFs 'ACE KRX Physical Gold' and 'TIGER KRX Physical Gold' over the same period. Observers say losses for investors who chased the rally late could snowball.

◇ "Rebound expected after a short-term correction"

The backdrop to the sharp fall in gold and silver prices is being attributed to the so-called 'Warsh effect'. Concerns grew that the pace of U.S. rate cuts would slow after news spread that Warsh, a former Fed governor, had been nominated as Fed chair. As the dollar rose, gold and silver prices, as alternative assets, came under downward pressure.

In international markets that day, spot gold slipped intraday to around $4,430 per troy ounce. That is about 20% below the intraday high ($5,595) recorded on the 29th of last month. Spot silver also fell to as low as $72, about 40% below its intraday high ($121) on the 29th. With gold up about 25% and silver about 70% since the start of the year, the market interpreted Warsh’s nomination as a pretext for a wave of large-scale profit-taking.

Brokerages largely view this plunge as a 'temporary correction' rather than the start of a sustained downtrend. Hwang Byeong-jin, an analyst at NH Investment & Securities, said, "Central banks in various countries, wary of rising U.S. federal government debt, continue to buy gold as part of efforts to diversify foreign-exchange reserves," adding, "With the Fed’s broader stance still geared toward monetary easing, demand for gold investment should remain solid." He kept this year’s expected range for gold prices at $4,350 to $6,000 per troy ounce.

Reporter Yang Ji-yoon yang@hankyung.com