Is the New Year rally over? Investors "take profits," gold and silver plunge.

After a strong rebound at the end of the year, the gold and silver markets experienced heavy sell-offs on Monday. Due to thin market liquidity at year-end exacerbating price volatility, traders took significant profits, causing precious metal prices to plunge across the board and ending the recent one-sided rally. Spot gold fell as much as 5% during the session, marking its largest single-day drop since October 21, and the second time this year such a steep daily sell-off has occurred. Silver's decline was even more dramatic, with an intraday drop reaching 11%, the largest single-day decline since September 2020. Both metals retreated sharply from just-set record highs, indicating that the previous rapid surge had stirred market concerns about overheating. Michael Haigh, Head of Fixed Income and Commodities Research at Societe Generale, warned, "Don’t over-interpret these large swings," noting that "liquidity is extremely thin" every year at this time. Haigh believes Monday's drop was mainly because investors chose to take profits after gold and silver faced a strong seasonal rebound. He pointed out that precious metals typically see a very strong rally before New Year. Over the past decade, gold has risen about 4% during this period, while silver’s gains have usually been close to 7%. Technical indicators also support the logic behind this sell-off. The 14-day Relative Strength Index (RSI), which measures buying and selling momentum, shows gold has been in overbought territory for the past two weeks, signaling an impending pullback. Silver's case is even more extreme: since mid-December, it has surged over 25%, and its RSI is far above the 70 level, indicating buying is too crowded in the short term. Speculative Sentiment Fades and Margin Hikes Silver’s reversal occurred just hours after it soared above $84 per ounce. Previously, strong investment demand from China had pushed silver prices up, causing the premium of spot silver in Shanghai over London prices to rise above $8 per ounce, setting a record for the largest price gap in history. Bloomberg cited analyst Wang Yanqing of China Futures Ltd., saying: “The speculative atmosphere is very strong. The market is hyping up tight spot supply, and the current situation is a bit extreme." Exchanges have started taking action to limit risk. According to CME Group Inc., margins on some Comex silver futures contracts will be raised from Monday. When margin requirements rise, traders must put up more cash to maintain their positions, forcing underfunded speculators to reduce or close their positions. Wang Yanqing believes this measure will help curb speculation. The world’s largest physical silver exchange-traded fund (ETF)—iShares Silver Trust—was not exempt either, dropping as much as 10% during the session, the biggest drop since 2020. Spot Market Pressure and Inventory Situation Bloomberg market strategist Brendan Fagan commented that silver’s dizzying rally and subsequent sharp pullback have kept market focus on the heavily pressured spot market. The latest silver rebound happened just two months after the London silver market experienced a full-scale short squeeze. At that time, inflows into ETFs and exports to India eroded already very low inventories. Although London vaults have seen significant inflows since then, most of the available silver globally remains in New York, with traders awaiting the results of a US investigation that may lead to tariffs or other trade restrictions. Risk Warning and Disclaimer The market has risks; investments must be made cautiously. This article does not constitute personal investment advice and does not consider the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their particular circumstances. Investment is at your own risk.