"The gold crash that 'everyone expected' has happened, and now everyone is waiting to buy the dip?"
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This week, the gold market saw a “widely anticipated” crash. On Tuesday, gold prices plunged 6.3% intraday, marking the biggest single-day drop since 2013.
However, Tuesday's gold crash did not seem to spark panic; instead, it ignited a wave of global retail investors rushing in to “bottom fish,” and the core views of most precious metals analysts remained unchanged.
Meanwhile, analysts, such as BofA’s Michael Hartnett, raised contrarian doubts, arguing that the logic supporting gold prices—driven by “devaluation trades”—is not solid, and that the basis for shorting the dollar and going long gold may not be as firm as imagined.
“Expected” Flash Crash
Professionals did not find this correction surprising.
On October 6, Nicky Shiels, Director of Research at precious metals refiner MKS Pamp SA, warned clients that gold was “a crowded trade, overextended in all technical indicators.” The day before the crash, as gold prices surged toward a historic high near $4,400, Marc Loeffert, a trader at Heraeus Precious Metals, also cautioned that the market was “becoming increasingly overbought.”
In fact, data from the New York Commodity Exchange (Comex) shows that trading interest in gold put options relative to call options had reached one of its highest levels since the 2008 global financial crisis.
It’s worth noting that this gold price drop seemed to lack a clear external catalyst; some traders attributed it to profit-taking by hedge funds or bank selling. Moreover, this turmoil was almost entirely confined within the precious metals market, with major global asset markets such as stocks, U.S. bonds, and oil virtually unaffected on the day.
Retail Investors Rush In as Institutions Remain Bullish
From Singapore to the U.S., gold dealers widely reported a buying frenzy, suggesting that global retail investors saw the price drop as a rare buying opportunity.
Pete Walden, Deputy CEO of Singapore dealer BullionStar, said the company had its busiest day ever on Tuesday, “with lines forming before opening, and far more buyers than sellers.”
Stefan Gleason of American dealer Money Metals Exchange also said he was overwhelmed by buyers looking for bargains.
Meanwhile, the core views of most precious metals analysts remained unchanged.
They generally view this as a “healthy correction” squeezing out market bubbles. Nicky Shiels of MKS Pamp SA commented this week:
“Bull markets always need healthy corrections to clear excesses, ensuring the longevity of the cycle... Prices should consolidate and revert to a stronger bullish trajectory.”
Gregory Shearer, an analyst at JPMorgan, stated in a report this week that profit-taking by investors would be absorbed by other physical buyers, including central banks, “buying the dip,” ultimately limiting the extent of the price fall. Shearer predicts that by Q4 next year, the average gold price will surpass $5,000.
Looking back, the core drivers of this gold bull market come from several aspects: first, large-scale buying by central banks, a trend that notably accelerated after the Russian central bank was sanctioned in 2022; second, deep-seated global investor worries about unsustainable levels of sovereign debt; and third, the recent surge has been fueled further by ordinary retail investors rushing in.
Contrarian View: The “Currency Devaluation” Logic Supporting Gold Isn’t Solid
Despite overall market optimism, some analysts see warning signals.
BofA strategist Michael Hartnett noted that gold has already surged 60% by 2025, and inflows over the past four months have surpassed the previous 14 years combined.
At the macro level, Hartnett questioned the “devaluation trade” logic that supports gold prices. He gave three reasons: First, the 10-year U.S. Treasury yield is under 4%; second, the U.S. achieved a budget surplus in September; third, the U.S. Dollar Index (DXY), which measures dollar strength, has yet to break below its April lows. Together, these factors suggest that the basis for shorting the dollar and going long gold may not be as solid as imagined.
Even bullish JPMorgan analyst Gregory Shearer listed “central banks slowing their buying pace” as the biggest risk to his bullish forecast in his report.
Moreover, the story following the last gold price peak in September 2011 is a cautionary tale. Back then, gold retreated after hitting a historic high of $1,921, and analysts attending the London Bullion Market Association (LBMA) annual conference were almost unanimously bullish. Yet, it took gold a full nine years to return to that record high.
Risk Disclaimer and Indemnity ClauseThe market carries risks, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their unique circumstances. Investing based on this is at your own risk. ```