Why have gold and silver plummeted?
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The plunge in gold and silver is driven by the reversal of interest rate expectations and liquidity pressures.
On Thursday, March 19, spot gold plummeted 3.5%, once dropping to the $4,500 mark, hitting a six-week low. Silver also plunged 12% intraday, then the decline narrowed substantially, and it closed in New York down 3.3%.
(Gold price plunges)
Since the US-Israel and Iran conflict, gold has fallen for several consecutive weeks.This week, the cumulative decline is nearly 8%, poised for the biggest weekly drop since March 2020. Former JPMorgan precious metals trader Robert Gottlieb warns investors:
Don’t rush to bottom-fish; the current market volatility is too high.
He added that until volatility narrows and prices stabilize and consolidate, selling pressure may persist.
Analysts believe that US and European central banks have released signals this week, suggesting the pace of interest rate cuts may be slower than previously expected. Meanwhile, both professional and retail investors are simultaneously reducing their exposure to precious metals. Under the dual pressure of dashed hopes for rate cuts and liquidity shocks, previous long positions in gold and silver are rapidly unraveling.
Reversal of Rate Expectations Is the Core Driver
The fundamental logic behind this round of decline is the repricing of the interest rate environment.
The Middle East conflict triggered surges in oil, natural gas, and fuel prices, raising market concerns about the outlook for global inflation.Since gold generates no interest income, shrinking expectations for rate cuts directly weaken its relative appeal.
Gold usually performs well during periods of low interest rates, since the opportunity cost of holding gold is lower; but when interest rates are high, assets such as bonds that provide stable returns become significantly more attractive to capital.
The energy shock caused by the conflict in the Middle East left global central banks at a crossroads between inflation and economic growth prospects, prompting hawkish statements this week;
The US Federal Reserve kept rates unchanged, language was hawkish;The Bank of Japan also stood pat, and said the Middle East situation complicates monetary policy outlook;The Swiss and Swedish central banks both warned of economic outlook uncertainties in coming months, and announced unchanged rates;The European Central Bank maintained rates but lowered growth forecasts and raised its inflation outlook, hinting at rising stagflation risks;The Bank of England’s statement is particularly noteworthy. The BOE clearly stated they are ready to "take action" to deal with inflation, which surprised the market.
Aakash Doshi, Global Head of Gold & Metals Strategy at State Street Global Advisors, said:
Before the outbreak of war, money markets expected the Fed to cut rates twice this year, whereas the current market pricing reflects that there will be no easing at all this year.
A similar logic played out in 2022. After the Russia-Ukraine conflict, surging energy prices pushed inflation higher, and from April to October that year gold fell for seven consecutive months.
(Spot gold fell for seven consecutive months after Russia-Ukraine conflict, image source: Wallstreetcn)
Retail Enthusiasm Cools, Net Outflows From ETFs
Retail investors' enthusiasm for gold is also showing signs of cooling.
According to VandaTrack data, the world’s largest gold ETF, SPDR Gold Shares, has been net sold by retail investors for six consecutive trading days, with net sales about $10.5 million during this period through Thursday's session.
However, this scale is still minor compared to previous buying frenzies; last year, the highest single-day net purchase reached $36.8 million. But analysts note the shift in direction itself sends a clear signal—retail investors’ willingness to allocate to gold is weakening.
Professional investors are also reducing metal positions. Trend-following hedge funds (CTA), which rely on algorithms to detect asset price trends, are actively trimming their gold positions amid current volatility.
Tom Wrobel, Head of Capital Consulting in Commodities Brokerage at Société Générale, said:
Over the past six to twelve months, CTAs have indeed established an upward long trend in gold. Now, they may still hold overall long positions but are managing risks and substantially scaling back those positions.
Suki Cooper, Global Head of Commodity Research at Standard Chartered, notes that given gold and silver prices surged over the past two years, some investors are taking profits to cover losses elsewhere, such as margin calls triggered by stock market declines.
The strengthening US dollar and the rising appeal of emerging investment opportunities such as energy stocks are also diverting capital. Cooper said:
Liquidity demands in other areas continue to suppress the geopolitical risk premium for gold.
This round of selling isn’t limited to gold and silver. Platinum and palladium have fallen 17% and 15% this month respectively. Industrial metals like copper and aluminum have also dropped in succession, reflecting a systemic downgrade to global economic growth expectations.
(Platinum dropped more than 20% this month at one point)
Edward Meir, analyst at commodity trading firm Marex, said:
Investors may be reaching the conclusion that once the global economy slows, demand destruction will inevitably occur.
Risk Disclosure and DisclaimerThe market involves risks, and investment needs caution. This article does not constitute personal investment advice and does not take into account any particular user's investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investment decisions based on this are at your own risk. ```