Gold and silver prices experienced a tumultuous week, with a notable shift from record highs to significant declines that sent shockwaves through the markets. After reaching an all-time peak of over $5,580 per ounce last Thursday, gold faced its steepest one-day drop in years on Friday, plummeting by approximately 9%. This downward trend continued into Monday, as gold prices fell further to around $4,545 per ounce before showing signs of recovery.
The initial surge in gold prices was driven by a surge of investment in safe-haven assets amidst persistent inflation in major economies and geopolitical tensions related to US-China trade relations, President Donald Trump’s ambitions regarding Greenland, Russia’s ongoing war in Ukraine, and Iran’s involvement in regional conflicts. Furthermore, rumors of expected interest rate cuts by the US Federal Reserve had a dual impact: softening the dollar while simultaneously boosting demand for gold.
Contributing to the soaring prices was a significant uptick in the buying of call options, which are contracts granting traders the right to buy gold at predetermined prices in the future. This created a feedback loop wherein option sellers were compelled to purchase the metal to hedge against potential losses, further inflating gold’s value.
Silver mirrored this volatility, soaring to a record of $121.64 per ounce last Thursday before experiencing a dramatic decline of nearly one-third. By Monday, silver had dropped approximately 41% to around $72 but also began to recover. The speculative trading in silver, alongside increasing industrial demand, played a significant role in its price movements. Silver’s use in technology and clean energy fueled heightened expectations, particularly amidst a surge of speculative investments in China that tightened its domestic supply.
The dramatic reversal in prices was largely precipitated by two critical announcements that altered market confidence. Firstly, the nomination of Kevin Warsh as the next chair of the Federal Reserve by Donald Trump was viewed as an indication that the Fed might not resort to aggressive interest rate cuts. Warsh’s reputation for being a hawk on inflation shifted expectations toward tighter monetary policy, leading to a stronger dollar which typically pressures gold prices.
Additionally, the Chicago Mercantile Exchange raised margin requirements for trading gold and silver, a move intended to mitigate excessive risk in the market. This announcement triggered forced liquidations among over-leveraged traders and heightened market instability.
Traders reacted rapidly to the price drops, with many unwinding their leveraged positions, leading to a marked decline in risk appetite. Analysts noted the scale of the market movements resembled those seen during the 2008 financial crisis, leading to chaos reminiscent of that period. Amidst these upheavals, liquidity evaporated during intensive selling, complicating the process of exiting positions without influencing market prices.
Despite the turmoil, some analysts contend that the downturn signals a classic correction phase rather than a collapse in the longer-term trend. With some recovery already seeing gold prices climb over 6% and silver over 12% in the days following the initial decline, experts suggest that there remain broader motivations for investors to accumulate gold, including demand from central banks and individual investors seeking protection from currency depreciation.
With resilient purchasing from central banks like those in China and Poland and continued industrial demand for silver, some analysts maintain an optimistic outlook. They believe the recent sell-off may have been excessively harsh, and as market conditions stabilize, both gold and silver may be poised for renewed growth in the coming months.