On Monday, bullion touched $4,381.52 per ounce, the latest peak in a rally driven by global risk aversion, speculation, central bank buying, and inflation hedging. However, by midday Tuesday, prices had dropped to $4,129.37, a dramatic reversal that left investors and traders reeling.
This abrupt shift follows a months-long upswing that saw gold appreciated consistently amid geopolitical unease, U.S. political dysfunction, and widespread economic concerns. The turnaround now underscores the precarious balance between market sentiment and macroeconomic signals that dictate gold’s value.
One of the primary drivers behind the sudden pullback in gold was improving sentiment around U.S.-China trade relations. Headlines late last week indicated that U.S. President Donald Trump and Chinese President Xi Jinping are expected to meet in the coming days to resume negotiations. Officials from both sides hinted at progress toward a “comprehensive and fair” trade agreement, easing concerns about a prolonged economic standoff between the world's two largest economies.
This unexpected thaw in tensions undercut one of the key pillars of the gold rally: the demand for safe-haven assets amid global uncertainty. As optimism grows toward a resolution of trade disputes, the urgency to hedge against economic deterioration via gold has softened significantly, triggering a cascade of profit-taking by both institutional and retail investors.
Another contributing factor was the renewed strength of the U.S. dollar. The greenback extended its positive momentum for a third consecutive day, buoyed partly by resilience in U.S. equity markets and fading expectations of immediate aggressive monetary easing by the Federal Reserve.
Gold, typically inversely correlated with the dollar, becomes more expensive for foreign investors as the dollar strengthens. This dynamic historically limits upside potential for bullion and prompts tactical selling. On Tuesday, this inverse relationship played out once again, accelerating gold’s descent below the psychologically important $4,300 level.
“Gold has drifted lower on Tuesday as some follow-through USD buying prompts profit-taking. While rate cut bets and the U.S. government shutdown may keep a lid on further USD gains, the immediate impact is increased volatility and weakness for gold,” said Haresh Menghani, a senior analyst at FXStreet.
Market volatility has intensified significantly. On Thursday and Friday of last week alone, more than 2 million options contracts tied to SPDR Gold Shares (GLD), the world’s largest gold-backed exchange-traded fund, changed hands. This activity exceeded historical averages and is now seen as a reflection of heightened hedging demand alongside increased speculative plays.
Such elevated volume typically precedes large price moves, and in this case, it coincided with a significant downturn. Some traders used the derivatives market to protect profits amid fears of broader risk-off sentiment fading. Others sought to capitalize on downside price moves by shorting options or initiating bearish spreads.
Analysts at Bloomberg noted that while ETF holdings haven’t yet returned to record highs, the sheer volume of trading indicates that investor enthusiasm had reached unsustainable levels. "History shows that momentum eventually fades, and in most cases, the buying morphs into selling," they cautioned.
Silver, buoyed by many of the same macroeconomic drivers as gold, also experienced a sharp reversal. After rallying nearly 80% year-to-date amid tight supply conditions and strong investment demand, silver fell 7.8% to $48.38 per ounce. The decline mirrored patterns seen in the gold market, made worse by supply chain disruptions in the London market and significant outflows from the Shanghai Futures Exchange’s vaults, the biggest one-day drop since February.
This widespread sentiment shift has also manifested in shipping trends, with traders moving physical silver to London to take advantage of higher prices there, further exposing vulnerabilities in the global supply chain.
The sharp pullback in bullion prices sent shockwaves through the equity markets, particularly among gold miners. Shares of Barrick Gold, Newmont Corporation, and Agnico Eagle Mines all fell more than 8% during early trading hours. The VanEck Gold Miners ETF (GDX), a benchmark index of global mining stocks, also plummeted 9.5%, marking its worst daily performance since the COVID-driven market crash in March 2020.
Investors responded quickly to deteriorating sentiment, pulling capital out of miners whose earnings are directly tied to gold prices. The rapid re-pricing highlighted the correlation between the commodity and its producers, and added a layer of complexity for portfolios exposed to precious metals both directly and indirectly.
While gold’s rapid decline has triggered concern, many experts believe this could represent a temporary correction rather than the beginning of a long-term reversal. Underneath the surface, structural supporters for gold remain intact, particularly expectations for further rate cuts from the Federal Reserve, ongoing geopolitical instability, and a still-fragile global economic outlook.
Markets are currently pricing in a 25-basis-point rate cut at each of the Fed's remaining policy meetings this year. Given gold's inverse relationship with interest rates, dovish monetary policy would likely reassert buying pressure on the metal.
Also, the U.S. government shutdown, now in its third week, adds a layer of fundamental risk that could reawaken safe-haven demand. Additional geopolitical uncertainties, particularly in Eastern Europe and the Middle East, could continue to offer tailwinds for gold once the dust settles from this correction.