After gold reached a record high of over $5,580 per ounce on Thursday, January 29, a day later it suffered its biggest daily loss in over four decades - on Friday it fell by almost 16 percent. By Monday, February 2, the price had fallen further and the precious metal had lost another 3.3%, reaching a value of $4,545 per ounce.
The new record for the precious metal was reached in the previous week, as more and more investors sought safe assets. The reasons for this were plentiful: stubborn inflation in major economies, ongoing trade tensions between the United States and China, the war in Ukraine, and fears that the crisis in Iran could escalate into a military conflict across the region.
Financial markets were also anticipating an imminent interest rate cut by the U.S. Federal Reserve. Such a move typically weakens the dollar and increases demand for gold.
Another factor that led to a rise in precious metals prices was a wave of purchases of call options - contracts that give traders the right to buy financial products, such as gold, in the future at a fixed price. That forced option sellers to buy the metal themselves to protect themselves from potential losses, setting off a cycle that pushed prices even higher.
Meanwhile, silver rose unexpectedly last week, hitting a record high of $121.64 an ounce on Thursday before plunging by almost a third shortly after. By Monday, it had fallen about 41% to around $72 before recovering.
The volatility in silver prices has been fueled by speculative trading and very high expectations about industrial demand for the precious metal. Silver is increasingly used in electronics, artificial intelligence (AI) and green energy production. In China, speculative investors further restricted domestic silver supply, pushing prices higher.
Why the sudden and dramatic price drop?
The sharp price drop was primarily due to two announcements that turned market sentiment around and led to large-scale forced selling.
First, on Friday, US President Donald Trump nominated Kevin Warsh to be the next chairman of the Federal Reserve (Fed). Warsh, who will replace Jerome Powell at the helm of the US central bank, is considered pragmatic, independent and experienced in crisis situations. Warsh's nomination was interpreted as a guarantee of the independence of the Federal Reserve. Financial markets expect that a more hawkish Fed chief is unlikely to yield to the White House's demands for a drastic and immediate rate cut, as Trump has repeatedly demanded of Powell.
Warsh's nomination led to a rise in the US dollar, contrary to investor expectations that the Trump administration was willing to tolerate a weak national currency.
On Saturday, the Chicago Mercantile Exchange, where gold and silver futures are heavily traded, increased its margin (collateral) requirements. This is the minimum collateral that traders must maintain for their leveraged or leveraged commodity futures.
How did traders react to the price drop?
The speed and scale of the sell-off in precious metals has alarmed traders and led to a rapid termination of futures and options transactions, as well as a sharp reduction in their willingness to take risks.
"I haven't seen such a sell-off in gold since the dark days of the global financial crisis in 2008," IG financial analyst Tony Sycamore told Reuters.
After the bankruptcy of "Lehman Brothers" In 2008, gold prices initially fell by more than a quarter of their peak, from nearly $1,000 to around $700 an ounce. The precious metal has since largely recovered as it was seen as a safe haven as global central banks took massive steps to stimulate the economy through expansionary monetary policy and slashed interest rates to near zero.
In the current crash, there has been little liquidity in the market as the sell-off has intensified, exacerbating price volatility and making it harder to close positions, market participants said.
"Bloomberg" quoted former precious metals trader Robert Gottlieb of "J.P. Morgan" as saying that trading was terribly oversold. According to him, the consequences of the massive sell-off may now hold prices back, as many traders find it increasingly difficult to dare to take new risks.
Is this the end of the bullish trend for gold and silver?
The sharp decline in gold and silver prices has sparked discussions among traders about whether the boom is truly over or just a pause after overheating.
Christopher Forbes, director of Asia and the Middle East at CMC Markets, believes that the sharp decline in gold prices is more like a classic correction after an unusual rise than a breakdown in the long-term trend. "A renewed weakness in the dollar or a less restrictive monetary policy under Warsh at the Fed would bring back buyers who are taking advantage of low prices," he says. Forbes expects gold to hit its highest levels in months in the next 12 months.
A Deutsche Bank report published on Monday said investors' motives for buying gold are "broader" than in previous price spikes and "likely not to weaken." In addition to institutional investors, Germany's largest bank highlighted continued demand from central banks, including those in China, Poland and South Korea, which will remain an important source of demand. Central banks buy gold to diversify their reserves and hedge against currency and geopolitical risks. Deutsche Bank also pointed to continued buying by private investors, particularly in Asia, who see gold as a hedge against currency depreciation and as a liquid investment.
Many analysts expect silver’s rally to continue as fundamentals appear stronger than gold’s. Industrial demand continues to grow while supply remains tight after years of underinvestment in exploration and mining.
Author: Nick Martin