Precious Metals Plunge: Unpacking the Sudden Collapse of Gold and Silver Prices

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Precious Metals Plunge: Unpacking the Sudden Collapse of Gold and Silver Prices

After a period of euphoric ascent that saw gold and silver prices soar to record highs, global markets witnessed a dramatic and sudden reversal last week, as precious metals experienced an unexpected and steep collapse. This sharp downturn, described by some analysts as a 'brutal correction' or even a 'rout,' triggered widespread panic selling and raised significant questions about the sustainability of previous gains and the future trajectory of these traditionally safe-haven assets.

Gold, for instance, had surged to an all-time high above $5,580 (€4,705) per ounce last Thursday, only to suffer its steepest one-day decline in years on Friday, plummeting by approximately 9%. The sell-off intensified, with the metal losing an additional 3.3% by Monday, reaching $4,545 per ounce. Silver, meanwhile, staged its own remarkable rally, hitting a record $121.64 per ounce last Thursday before swiftly plunging by nearly a third. By Monday, it had dropped by around 41% in total to approximately $72, before showing initial signs of recovery.

The preceding unprecedented surge in precious metals was fueled by a confluence of economic and geopolitical factors. Investors had piled into safe-haven assets amid persistent inflation concerns in major economies and escalating geopolitical tensions, including US-China trade relations, US President Donald Trump's Greenland ambitions, Russia's war in Ukraine, and Iran's role in regional conflicts. Financial markets also reacted to expectations of imminent interest rate cuts by the US Federal Reserve, a move that typically weakens the dollar and boosts demand for gold. Furthermore, a wave of buying in call options—contracts granting traders the right to purchase financial products like gold at a set future price—contributed to the upward momentum. This forced option sellers to buy the underlying metal to hedge against potential losses, creating a self-reinforcing loop that pushed prices even higher.

Silver's extreme rally was additionally propelled by aggressive speculative trading and robust expectations for industrial demand, given its increasing use in electronics, artificial intelligence (AI), and clean-energy production. In China, a surge of speculative capital further tightened the domestic silver supply, exacerbating price increases.

However, this positive momentum abruptly reversed due to two primary announcements that fundamentally shifted market sentiment and triggered widespread forced selling. First, on Friday, Donald Trump nominated Kevin Warsh as the next Federal Reserve chair. Warsh, poised to succeed Jerome Powell as the head of the US central bank, is widely regarded as a pragmatic, independent voice with extensive experience from economic crisis eras. Markets interpreted this nomination as a more orthodox choice, signaling that the Fed would be less likely to yield to calls from the White House for drastic, immediate rate cuts—demands that Trump had repeatedly directed at Powell. Warsh's nomination immediately strengthened the US dollar, contrasting sharply with investors' prior bets that the Trump administration would tolerate a weaker currency. Among the shortlisted Fed chair candidates, traders viewed Warsh as the most hawkish on inflation, thereby elevating expectations of tighter monetary policy, which would bolster the dollar and exert downward pressure on gold, which is denominated in dollars.

Second, over the weekend, the Chicago Mercantile Exchange (CME), where gold and silver futures are heavily traded via COMEX (Commodity Exchange, Inc.), significantly raised margin requirements. These requirements represent the minimum collateral traders must maintain for their leveraged or debt-funded positions. The announcement was a deliberate attempt to curb excessive risk-taking and ensure market stability, with the changes slated to take effect after the markets closed on Monday.

The sheer speed and scale of the sell-off in precious metals rattled traders, prompting a rapid unwinding of leveraged positions and a sharp pullback in overall risk appetite. Tony Sycamore, an IG market analyst, told Reuters news agency, "The scale of the unwind unfolding in gold today is something I haven't witnessed since the dark days of the 2008 global financial crisis." Following the collapse of Lehman Brothers in 2008, gold initially plunged by more than a quarter from its peak near $1,000 to a low of around $700 per ounce. However, the metal later recovered strongly as it was perceived as a critical safe-haven asset, especially as global central banks launched massive economic stimulus measures, including quantitative easing (QE), and slashed interest rates to near zero.

During the current rout, several traders reported that liquidity evaporated during the heaviest selling on Friday, magnifying price swings and making it exceedingly difficult to exit positions without further disrupting the market. Other analysts pointed to overcrowded bullish bets that left the precious metals market particularly vulnerable once prices began to turn. Bloomberg quoted former JPMorgan precious metals trader Robert Gottlieb as stating, "The bottom line is that the trade was way too crowded," adding that the fallout could keep prices in check as traders become more reluctant to take on fresh exposure.

The dramatic price swing has left traders and analysts debating whether the boom is truly over or merely pausing after an overheated run-up. Michael Brown, a senior research strategist at Australian financial broker Pepperstone, was cited by the AFP news agency as saying, "The question everyone is now asking is what happens next?" He added, "I would flag that, in a similar manner to the rally seen in recent weeks, there is now a solid argument that the pullback has also run 'too far, too fast'." Christopher Forbes, head of Asia and the Middle East at CMC Markets, also believes gold's sharp retreat looks more like a classic correction after an extraordinary surge than a fundamental collapse in the longer-term trend. "Renewed dollar weakness or confirmation of a dovish Warsh would bring dip-buyers back," said Forbes, who projects gold could retrace recent highs over the next 12 months.

In a report published Monday, Deutsche Bank asserted that investor motivations for buying gold are "broader" than in previous price surges and "not likely to be allayed." Beyond institutional investors, Germany's largest lender highlighted continued appetite from central banks—including China, Poland, and South Korea—which it expects to remain a major source of demand. Central banks typically acquire gold to diversify reserves and protect against currency and geopolitical risks. Deutsche Bank also pointed to resilient buying from individual investors, particularly in Asia, who view gold as a hedge against currency depreciation and a portable store of wealth.

Many analysts believe silver's rally has further potential, primarily because its underlying fundamentals appear stronger than gold's. Industrial demand continues to rise, and supply remains tight after years of underinvestment in exploration and mining, suggesting silver may exhibit greater resilience in its long-term recovery.

Ekhbary News Agency