Key takeaways
- Sharp one-day drop: Steepest single-day decline since 2020, after being up over 65% year to date.
- Short-term risk/reward less favorable: Prior to the pullback, gold had become the most technically extended since 2006, making its near-term risk/reward profile less compelling.
- Further consolidation likely: Given how stretched gold had become, the current correction likely has more room to run before stabilizing.
- Long-term structural positive view intact: Despite near-term weakness, we remain constructive on gold’s role as a portfolio diversifier—though patience will likely
be required.
What happened?
Gold saw its largest single-day decline since 2020. Silver also sold off sharply following notable year-to-date gains. No single catalyst drove the selloff; rather, gold’s recent upward trend had moved at an unsustainable pace, leaving it vulnerable to a sharp reversal. Recent aggressive fund inflows further crowded the trade.
Our take
After maintaining a bullish stance all year, we discussed last week that gold’s short-term risk and reward had become less compelling. Indeed, gold’s rally, which totaled more than 65% for the year and accelerated sharply in the past month, pushed prices to more than 30% above the 200-day moving average. This was the largest deviation from its trend since 2006.
Much like a rubber band that becomes stretched too far, the eventual snapback can be sharp. The recent selloff illustrates how quickly momentum can reverse when conditions become unsustainable. Gold’s positioning also became increasingly crowded as aggressive fund inflows accumulated over recent weeks and months. This surge in demand left the market more vulnerable to a swift correction once sentiment changed.
Historical Analysis
Daily declines of more than 5% in gold are rare, with only 44 instances since the end of Bretton Woods in 1971, when gold was decoupled from the U.S. dollar and began trading freely. These sharp drops tend to cluster around cyclical turning points or during the late stages of uptrends.
While short-term rebounds following such declines are relatively common, the longer-term outcomes are more mixed, as shown in the table below.
- Typical returns over the 3- and 6-month periods after these sharp daily drops have been positive more often than not.
- Median returns 12-month later have been negative, with positive results in only about 40% of cases.
- These episodes often signal market exhaustion and precede periods of correction or consolidation, though the range of outcomes can be wide.
Market signals
From a technical perspective, there is strong support around gold’s rising 50-day moving average.
Key long-term positive trends remain intact. Central bank buying, persistent geopolitical risks, potential recovery in retail/jewelry demand, lower rates, and ongoing debasement concerns remain supportive of the long-term trend. Additionally, while stretched on a short-term basis, the current upcycle appears early compared to historical cycles.
Bottom line
On a short-term basis, gold became overextended, making it vulnerable to a setback. We expect this correction to continue in both price and time, and patience is warranted as the market digests recent gains.
Structurally, we remain positive as long-term drivers—including central bank buying, geopolitical risks, potential recovery in retail/jewelry demand, lower rates, and debasement concerns—continue to support gold’s strategic case. The current upcycle also appears early relative to historical cycles.
While near-term risk/reward is less favorable, gold’s role as a portfolio diversifier and safe haven remains intact, and we would look at deeper pullbacks as potential opportunities for those not invested in the asset.
As always, we will continue to follow the weight of the evidence and keep an open mind.
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