Gold saw its steepest price drop in over 10 years on Monday, falling nearly 20% from its recent peak above $5,500 an ounce. Silver took an even bigger hit, with intraday losses approaching 12% and one of the most severe short-term declines on record.
Why this sell-off looks mechanical, not fundamental
Yet the recent declines appear to be driven more by leveraged trading than by a fundamental decline in demand.
Indeed, gold rose 3% in Asian trading on Tuesday to $4,820 an ounce, recovering around 9% from Monday’s lows, whilst silver climbed 5% to $83.34 an ounce.
As I was quoted by CBS News, Investing.com, The Economic Times, London Loves Business, Business Money, and Omanet, amongst other media, gold increased too fast, too far, reaching record levels, and the way it surged left it vulnerable once prices began to fall.
At its peak, a significant portion of the gold market was held by traders using borrowed funds. Futures contracts, options, and leveraged ETFs all grew rapidly as prices soared past $5,000 an ounce.
Those positions work smoothly only when prices are rising or stable. Once prices started to decline, the system quickly became hostile.
The initial stage of the fall was driven by forced selling rather than voluntary selling. As volatility surged, margin requirements increased, forcing traders to either post cash immediately or liquidate their positions.
Many traders either chose or were forced to sell, a process that drives prices down regardless of the underlying fundamentals.
This explains the rapid and intense nature of the decline. Gold didn’t drop because long-term investors changed their outlook, but because leveraged traders were forced to exit.
This phase is typically self-limiting.
Once the leverage is cleared, selling pressure naturally eases. Forced sellers are no longer in the market, daily price swings become smaller, and liquidity improves.
Prices stabilise not due to a shift in sentiment, but because the mechanical selling pressure comes to an end.
Three reasons gold is likely to stabilise
I believe there are several key factors suggesting that gold’s decline is likely to stabilise.
First, lower gold prices attract genuine buyers rather than short-term traders.
For example, physical demand from Asia typically rises after sharp pullbacks, especially when prices retreat from recent highs. Buyers who had stayed on the sidelines during the rally often re-enter the market once volatility eases.
Second, central banks take a long-term view.
They rarely chase price rallies, but they tend to buy when prices dip. A correction from record highs to more stable levels fits more naturally with how they manage reserves.
Third, hedging demand comes back once prices stop dropping in a straight line.
Institutions that had paused their allocations during periods of extreme volatility typically resume activity once daily price movements become more orderly.
None of this occurs at the market peak; it only happens after the initial damage has been done.
What rebounds after forced selling typically look like
A rebound usually follows a period of leverage-driven liquidation.
Gold tends to rebound after leverage-driven sell-offs because the fundamental reasons for holding it generally remain unchanged.
Debt levels don’t decline during corrections, fiscal pressures persist, currency competition continues, and policy constraints remain in place. A price reset adjusts market positioning without altering the underlying macroeconomic environment.
Once forced selling ends, prices typically begin to recover quietly. Early gains are often uneven and thinly traded, reflecting repositioning rather than renewed enthusiasm. It’s only later that momentum truly rebuilds.
Importantly, rebounds after leverage-driven sell-offs rarely push gold back to previous highs right away. Instead, gold typically forms a base, trading sideways as confidence gradually rebuilds.
Gold’s recent plunge follows a familiar pattern: excessive leverage created vulnerability, volatility triggered margin calls, forced selling pushed prices down, and market positions are now being reset.
Once leverage is cleared, prices stabilise.
The recovery might be gradual rather than sudden, but the mechanics suggest a rebound is more likely than a continued freefall once the forced-selling phase concludes.
To read my previous blog post, click here.