Metals Rebound: Is Contagion Looming?

The recent sharp decline in precious metals, including gold and silver, appears to have temporarily halted, with both commodities trading higher on Tuesday. Major financial institutions like JPMorgan continue to advocate for gold, citing robust underlying fundamentals and the ongoing outperformance of "real assets" compared to traditional investments like stocks and bonds.

However, concerns are mounting that this volatile trading could signal deeper market instability. Joachim Klement, head of strategy at Panmure Liberum, has cautioned about the risk of international market contagion. He noted that a significant drop in Microsoft's stock price, triggered by high capital expenditure worries, was accompanied by a simultaneous 7.7% fall in gold prices and a 4% drop in bitcoin.

Klement suggests that this contagion effect is fueled by investors who have become overextended, possibly by using margin debt to invest in popular assets. He points to historical lows in cash balances relative to margin debt in U.S. accounts as evidence. If these leveraged positions begin to decline, investors may face margin calls, forcing them to raise cash and potentially triggering further selloffs across correlated and uncorrelated assets.