ASX hit hard as plunge in gold, silver deepens

A plunge in gold and silver prices extended on Monday, dragging down the Australian sharemarket after speculators in precious metals reacted to US president Donald Trump’s nomination of Kevin Warsh as the next US Federal Reserve chair.

The S&P/ASX200 dropped by 1 per cent or 90.5 points to 8778.60 on Monday, with mining and energy shares posting the sharpest falls as gold and silver miners plummeted, giving up some of the huge gains in precious metals over the past year.

It was a sea of red for the market’s biggest gold miners, with Northern Star Resources plunging 8.1 per cent and Evolution Mining dropping 5.6 per cent, while Newmont Corporation fell 10.1 per cent.

Silver players also fell sharply, with South32 losing 4.3 per cent. The big falls came after the price of gold dropped about 10 per cent on Saturday and a further 3.6 per cent on Monday, while the spot price of silver also extended its loses after plunging 27 per cent in the previous session. Sharemarkets in Hong Kong and Japan were also lower, and futures were pointing to falls on Wall Street.

Even after the dramatic falls, gold and silver prices are still up dramatically over the past year as investors and speculators have piled into the precious metals, which are seen as a hedge against geopolitical turbulence and policy uncertainty. Hopes of a fall in US interest rates have also boosted gold, and some in the market viewed Trump’s nomination of Warsh as the next Fed chairman as a sign that rates may not fall as much as hoped.

Ten Cap co-founder and portfolio manager Jun Bei Liu said the prices of gold and silver had been “very, very frothy” and Warsh’s nomination was a reason for some in the market to take some profit. But she thought gold would remain in demand despite the recent plunge. “I think we just have so much geopolitical uncertainty,” Liu said.

AMP chief economist Shane Oliver also said the weekend plunge in gold and silver prices looked like “a bit of a correction,” adding that “both gold and silver were very overbought and vulnerable to a sharp fall having risen so far so fast.”

Other mining stocks retreated on Monday, with iron ore powerhouse BHP shedding 2.3 per cent and Rio Tinto dropping 1 per cent. Fortescue recovered from a dip earlier in the day to close 0.9 per cent higher.

Energy stocks slid as oil prices retreated. Woodside Energy lost 1.8 per cent, Santos shed 3.2 per cent and Ampol closed 1.1 per cent lower.

Financial stocks were mixed, with banking giant Commonwealth Bank posting a 1.4 per cent gain while Westpac (up 0.3 per cent) and ANZ Bank (up 0.1 per cent) also moved higher. National Australia Bank lost 1 per cent and Macquarie Group was 0.2 per cent lower.

Elsewhere, Jamie Pherous, founder and managing director of the embattled Corporate Travel Management, is stepping down with immediate effect, months after trading in its shares was halted and following a scandal over alleged over-charging of government clients.

Over the weekend, financial markets churned as investors tried to figure out what Trump’s new nominee to lead the Federal Reserve would mean for interest rates.

US stocks fell, with the S&P 500 down 0.4 per cent after sinking as much as 1.1 per cent earlier in the day. The Dow Jones dropped 179 points, or 0.4 per cent, and the Nasdaq composite lost 0.9 per cent.

Whoever leads the Fed has a big influence on the economy and markets worldwide by helping to dictate where the US central bank moves interest rates. Such decisions lift or weigh on prices for all kinds of investments as the Fed tries to keep the US job market humming without letting inflation get out of control. Trump has been pushing for lower interest rates, which usually help goose the economy but can also cause higher inflation.

The long-time assumption has been that the Fed should operate separately from the rest of Washington so that it can make moves that are painful in the short term but necessary for the long term. To get inflation down to the Fed’s goal of 2 per cent, for example, may require the unpopular choice to keep interest rates high and grind down on the economy for a while.

The big question is what Warsh’s nomination, which still requires approval from the Senate, means for the Fed’s independence.

Warsh used to be a governor on the Fed’s board, so investors are familiar with him. That could also mean Warsh is familiar with and hopes to continue the institution of the Fed as an independent operator. He has criticised the central bank’s buying of bonds to keep interest rates low.

Some on Wall Street took Warsh’s nomination as an encouraging signal for a still-independent Fed that will keep rates high, if necessary. Besides slowing the economy, higher interest rates would push downward on stock prices.

Warsh has also recently been critical of the Fed’s current chair, Jerome Powell, and has voiced support for lower rates.

Helping to limit the market’s losses was Tesla, which rose 3.3 per cent. It bounced back after dropping on Thursday despite delivering better profit reports for the latest quarter than analysts expected.

Apple added 0.5 per cent after the iPhone maker reported a stronger profit for the latest quarter than analysts expected.

With AP, Bloomberg

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