Gold plummets: What's the outlook moving forward?

Investment Highlights

The recent sharp decline in gold prices is mainly a normal adjustment caused by prior overbought conditions, high leverage, and crowded trading, and does not change the long-term bullish pattern of gold. In the medium to long term, it remains worthwhile to focus on gold allocation opportunities.

1) Short-term: Why the big drop? The main reason is not the Federal Reserve.

First, we believe that the primary cause of the significant decline in precious metals is the previous irrational overextension. Under this circumstance, the accumulation of profit-taking demand makes even minor marginal disturbances lead to sharp pullbacks. Second, the leverage accumulated by retail investors during the irrational rise has become a volatility amplifier. “Wash trading” is just one of the triggers that ignited the shift in sentiment towards precious metals, not the main cause.

2) Medium-term: Focus on opportunities brought by oversold conditions

The previous rise in gold was mainly concentrated during Asian and American trading hours. During this decline, gold prices in the US and Asian markets have already experienced significant adjustments, and gold prices have stabilized somewhat during European trading hours. As the deleveraging process at various exchanges concludes, gold prices are expected to gradually stabilize. Overall, the medium to long-term trend of gold remains intact, and it is advisable to pay attention to oversold opportunities for gold allocation.

Silver is scarce in the short term but not in the long term. Short-term pressure on silver is relatively high, and its supply is temporarily scarce, making it a tool for “speculative” gold trading: when gold rises, silver rises even more; when gold falls, silver falls even more. However, in the long run, silver supply is not as scarce, so the silver-to-copper ratio will remain stable over time, and the gold-to-silver ratio will trend upward in the long term.

3) Long-term: Gold still has support.

The recent sharp decline in precious metals is a technical correction of the irrational rally since the beginning of the year, not the end of the long-term gold bull market. In the short term, the cooling of overheated speculative sentiment and the decline in leverage levels help gold return to a healthier and more stable upward trend.

In the long term, the gold bull market pattern still exists, and large short-term declines often present good opportunities to add positions. Ongoing geopolitical risks, increasing fiscal pressures in major economies, and lingering concerns about dollar creditworthiness mean the global monetary system is still undergoing restructuring. Central bank gold purchases still have significant room to grow, and the long-term upward trend of gold remains solid.

1 Short-term: Why the big drop? The main reason is not the Federal Reserve

Since 2026, precious metals like gold and silver have experienced a rollercoaster of rapid rises and falls. As of February 2, London gold has fallen from nearly $5,600 per ounce to around $4,500, a decline of nearly 20%. London silver has plummeted from $121 per ounce to below $80, a drop of nearly 40%. The scale and speed of this correction are rare in history. Additionally, metals like copper, nickel, and aluminum have also experienced noticeable declines.

Why did gold and silver plunge? First, we believe the main reason is the previous irrational overextension. Since the beginning of the year, catalyzed by events such as Trump’s threat to buy Greenland, escalating tensions with Iran, and the risk of another US government shutdown, the dollar’s credit fissures widened again, strengthening gold’s safe-haven and currency attributes. In just one month at the start of 2026, gold gained nearly 25%, and silver surged nearly 70% in January. According to RSI indicators, gold has been in an overbought state since January amid rapid price increases. This accumulation of profit-taking demand makes even small disturbances trigger sharp corrections.

Second, the leverage accumulated by retail investors during the irrational rally has amplified volatility. Since January, retail investors have shown strong willingness to leverage, with net long positions in non-reporting gold futures reaching historic highs in January. In contrast, institutional investors have been relatively restrained in their bullish sentiment in derivatives markets. Compared to institutions, retail investors tend to have high leverage, low tolerance, and herd behavior. When faced with significant price drops and consecutive margin increases by exchanges, this can trigger a “longs killing longs” spiral, leading to forced liquidations and accelerated deleveraging.

“Wash trading” is just one of the triggers that ignited the shift in sentiment towards precious metals, not the main cause. In fact, although Wash’s balance sheet reduction stance makes him appear more hawkish, the liquidity in the US interbank market has already shifted to a slightly tight state, making it difficult for Wash to push for balance sheet reduction in the short term. He is more likely to adopt a policy of rate cuts first. Recently, the decline in the 10-year US Treasury yield instead of rising also reflects that the bond market does not see a more hawkish monetary policy from Wash.

In the context of prior overbought conditions and crowded leverage, precious metals reacted more intensely to Wash’s election and the marginal cooling of geopolitical risks. The risk-off sentiment and liquidity shocks caused by the sharp decline in precious metals also somewhat infected other asset markets, leading to a broad-based downward adjustment.

2 Medium-term: Focus on opportunities from oversold conditions

Looking at different trading sessions, since January, the rise in gold has mainly been concentrated during Asian and American trading hours. In early January, affected by the margin hikes at major exchanges, the US session experienced a brief correction, followed by a return to the upward trend. The Asian trading session showed relatively steady gains, accelerating after January 18. In contrast, gold performance during European hours has been more subdued.

During this correction, as of February 2, there have been clear adjustments in Asian and American trading hours, nearly erasing the previous acceleration gains. European trading hours have begun to stabilize and rebound. As the deleveraging process at various exchanges concludes, gold prices are expected to stabilize and stop falling. Overall, the medium to long-term outlook for gold remains intact, and it is advisable to focus on oversold opportunities for gold allocation.

Silver is scarce in the short term but not in the long term. Short-term pressure on silver remains high, and its supply is temporarily scarce, making it a tool for “speculative” gold trading: when gold rises, silver rises even more; when gold falls, silver falls even more. In the long run, silver supply is not as scarce, so the silver-to-copper ratio will stay stable, and the gold-to-silver ratio will trend upward over time.

However, implied volatility for gold remains high, and gold prices may continue to experience high volatility in the short term.

3 Long-term: Gold still has support

We believe that the recent sharp decline in precious metals is a technical correction of the irrational rally since the beginning of the year, not the end of the long-term gold bull market. In the short term, the cooling of overheated speculative sentiment and the decline in leverage levels will help gold return to a healthier and more stable upward trend.

In the long term, the pattern of a gold bull market still exists, and large short-term declines often present good opportunities to increase positions. Ongoing geopolitical risks, increasing fiscal pressures in major economies, and concerns about dollar creditworthiness mean the global monetary system is still undergoing restructuring. Central bank gold purchases still have significant room to grow, and the long-term upward trend of gold remains solid.

This article is sourced from: Liang Zhonghua Macro Research

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