The precious metals market has seen extreme volatility. Gold has plunged nearly 20%, and silver has declined about 45% within just three days, wiping out most of the year-to-date gains. Such a sharp correction is rare and reflects the risks of crowded trades in fast-moving markets.

Over the past year, gold and silver surged to record highs, surprising even experienced market participants. The rally intensified in January as investors sought protection amid geopolitical uncertainty, concerns over currency debasement, and questions around the Federal Reserve’s independence. Strong speculative buying, particularly from China, further amplified the move.

Key factors behind the sharp correction:

1)    Overcrowded and overbought conditions

Market positioning had become stretched, with record speculative long positions, strong ETF inflows, increased retail participation, and overextended technical indicators. Silver was especially vulnerable due to thinner liquidity and higher leverage. Once prices turned, stop-loss selling and forced liquidation accelerated the decline, with no clear price floor initially visible.

2)    Nomination of a new Fed Chair

President Trump nominated former Federal Reserve Governor Kevin Warsh to succeed Jerome Powell. While rate cuts remain possible, Warsh is viewed as less dovish than markets had anticipated. His emphasis on inflation control and scepticism toward aggressive quantitative easing supported the US dollar, which weighed on gold prices.

3)    Disconnect between paper and physical markets.

A significant divergence has emerged between paper prices and physical availability, especially in silver. Several global mints-imposed sales limits or suspensions, the US Mint halted silver product sales, and delivery delays were reported across key markets, including India. Rising lease rates further point to tight physical supply, even as paper prices corrected sharply.

4)    Margin pressure at exchanges

Major exchanges, led by CME, raised margin requirements on gold and silver futures in response to heightened volatility. Higher margins increased the cost of holding leveraged positions, forcing liquidations. Historically, such margin hikes tend to reset market positioning rather than end long-term bull trends.

Overall, the recent sell-off reflects structural liquidity stress rather than a sudden deterioration in fundamentals. While paper-market prices declined sharply due to forced selling, elevated physical premiums signal ongoing tight supply and highlight the growing divide between financial trading and physical metal ownership.

Looking ahead, market focus will remain on geopolitical developments between the US and Iran, along with key US economic indicators, particularly the ISM Manufacturing PMI and Nonfarm Payrolls.

Historically, periods of strong momentum are often accompanied by sharp but temporary volatility. While recent price action has disrupted short-term technical charts, the long-term trend remains constructive. This suggests the current correction is likely a typical “shake-out” within an ongoing long-term bull market for precious metals.

Gold prices are expected to fall by 3-4% and take support around $4320–4300 (~ Rs 133,000-135,000) zone and stabilise at those levels. These dips should be used as a buying opportunity to accumulate atleast 50% of the investment amount for the long-term. On the upside, any rebound is likely to face immediate resistance near the $4,750–4,800 zone.

Silver has key support in the $70–72 range (~ Rs 200,000-20,000). Prices are expected to stabilise near these levels and could rebound toward the $80–82 zone. These dips should be used as a buying opportunity to accumulate atleast 50% of the investment amount for the long-term.

Dr.Renisha Chainani, Head- Research, Augmont