After a strong rally at the end of the year pushed gold and silver to record highs, traders rushed to take profits, causing the prices of the two metals to plummet. The lack of market liquidity exacerbated the price volatility.
Spot gold prices once dropped by 5%, marking the biggest one-day decline since October 21 and the second such sharp one-day fall this year. Silver prices plunged by 11%, the biggest one-day drop since September 2020. Both precious metals have significantly retreated from their record highs, as the previous rally was too fast and too early, raising market concerns.
Michael Haigh, head of FIC and commodities research at Société Générale, said, “Don’t overinterpret the large-scale market fluctuations,” and added that market liquidity is often “very poor” at the end of each year.
Hague said that Monday’s decline was mainly due to profit-taking in gold and silver after a strong seasonal rally. Precious metals have historically seen very strong gains during the period from the end of the year to the New Year. He pointed out that over the past decade, gold has risen by about 4% during this period, while the increase in silver is usually close to 7%.
Technical indicators for gold also supported this round of selling. The 14-day relative strength index (RSI, a measure of buying and selling momentum) has been in the overbought zone for the past two weeks. This indicates that the rally in gold is about to correct.
The situation with silver is similar, and even more intense: since mid-December, the price of silver has risen by more than 25%, and its relative strength index (RSI) has remained far above 70. An RSI above 70 indicates that there are too many investors buying silver in a short period of time.
The world’s largest physically-backed silver exchange-traded fund, the iShares Silver Trust, dropped by 10%, marking its biggest decline since 2020.
On Monday, the price of silver plunged sharply. Just a few hours earlier, the price of silver had soared above $84 per ounce due to a surge in investment demand. The premium of spot silver in Shanghai over the London price exceeded $8 per ounce, setting a record for the largest price gap.
The latest round of silver price increase occurred just two months after a comprehensive sell-off in the London silver market. At that time, the silver flowing into exchange-traded funds (ETFs) and exported to India consumed the already extremely low inventory. Since then, there has been a large inflow of inventory in London, but as traders are still waiting for the outcome of a U.S. investigation that could lead to tariffs or other trade restrictions, most of the world’s silver remains stuck in New York.
