A violent shock in the precious metals markets
Precious metals markets experienced a sharp decline, with gold and silver continuing their significant drop that began last Friday. This decline follows a period of strong gains that propelled the yellow metal to record highs, raising a pressing question among investors and analysts: Is this merely a healthy market correction or the beginning of a collapse in gold prices?
Historical context: Gold as a safe haven
Throughout history, gold has earned its place as a primary “safe haven” during times of economic and geopolitical crisis. Investors turn to it to preserve the value of their wealth against the risks of inflation, stock market volatility, or political instability. Gold typically thrives in an environment of low interest rates and a weak US dollar, as lower interest rates reduce the opportunity cost of holding gold, which does not generate returns, while a weak dollar makes gold cheaper for buyers using other currencies.
The three main factors behind the recent decline
The current downturn can be attributed to the interaction of three key factors that have reshaped market expectations:
1. Changing expectations for monetary policy and the strength of the dollar
The most significant factor was the shift in expectations regarding the US Federal Reserve's policy. The nomination of Kevin Warsh, known for his hawkish monetary stance, to lead the central bank sent a strong signal to markets that the era of low interest rates might be drawing to a close. Tighter policy means raising interest rates to curb inflation, which strengthens the appeal of the US dollar and government bonds at the expense of gold. As José Torres, chief economist at Interactive Brokers, explained, this development revived the "buy US" strategy, causing gold's upward momentum to fade.
2. Profit-taking after a record rise
After achieving exceptional gains and reaching historic highs, it was natural for investors to begin taking profits to secure their gains. Christopher Forbes, head of Asia and the Middle East at CMC Markets, believes this pullback is a “temporary dip after an exceptional rally,” reflecting a technical correction rather than a collapse in the long-term positive outlook. Profit-taking increases supply in the market, putting downward pressure on prices in the short term.
3. The exit of speculators and the reduction of geopolitical risks
Technical factors also played a significant role. The Chicago Board Options Exchange (CME) raised margin requirements on gold and silver futures contracts. This action increased the cost of leveraged trading, forcing many speculators to close their positions and exit the market, thus sharply reducing demand. Simultaneously, statements suggesting a possible agreement between the United States and Iran helped ease geopolitical tensions, diminishing gold's appeal as a safe haven.
Expected impact and future outlook
Globally, this volatility impacts the decisions of central banks that hold gold as part of their reserves, as well as mining companies and individual investors. Regionally, particularly in the Middle East where gold is highly popular as an investment and savings vehicle, these price movements directly affect individual wealth. Analysts agree that gold's near-term trajectory will remain volatile, pending greater clarity on upcoming US monetary policy. Despite the sharp decline, gold remains significantly higher than at the beginning of the year, indicating that the fundamental factors supporting the precious metal in the long term, such as inflation concerns and global debt, have not yet disappeared.
