Theme of the Day: Drivers behind gold’s sharp reversal

Gold has fallen to new lows for the year as bond yields move sharply higher with next key support seen at $4,090–$4,066, which includes its long-term 200-day moving average (~$4,100) and the 38.2% retracement of the 2022/2026 uptrend. Prices recorded their biggest weekly loss since 1983 on concerns higher inflation will see the Fed hike rates. Should weakness directly extend and a sustained close below $4,090-$4,066 emerge this would warn of yet further weakness with support then seen next at the Oct 2025 low at $3,887. The gold price was $2,625 at the start of 2025 and $4,319 at the start of 2026 for a 65% gain, which is considerable for what is normally a low-volatility, safe-haven asset. The daily RSI reached 93 at the end of Jan, which indicated that gold was extremely overbought, so a period of consolidation was inevitable. The drivers of the weakness are currently debated said the World Gold Council. Sharply higher real yields and expectations that policy rates will now rise in 2026, alongside de-leveraging and profit-taking, have all weighed on sentiment. The speed and breadth of market moves echo risk-off episodes seen in 2008 and 2020, when liquidity dynamics temporarily dominated fundamentals. The prospect of a prolonged Middle East conflict is concerning, as it raises humanitarian and geopolitical risks alongside the threat of economic stagnation and higher industrial input prices. We’re in wait-and-see mode. Most central banks, including the Fed, ECB, BoE, BoJ, held rates steady but highlighted rising inflation risks and signalled a hawkish bias, while the RBA hiked. There has been quite a shift in the market’s view of the future for US interest rates in the last week with no change this year now having the highest odds, followed by one rate cut, with significantly lower odds of more than one cut. Economic data was mixed, stronger in China but weaker across other major economies. Liquidity is tightening. Oil disruption is squeezing GCC revenues and China is slowing, so the marginal buyer steps away. At the same time, gold had become a crowded momentum trade — ETFs, retail, trend followers. When prices turned, stops were hit, positions unwound, and the move accelerated. Gold ETF option traders dialled back their bullish bets notably. And as gold breached key thresholds, further sell-offs may have been triggered, amplifying gold’s weakness. This week, the Middle East conflict remains a key driver for gold. Any signs of the Strait of Hormuz reopening – alleviating energy disruptions - could rebuild investor confidence. On the flipside, prolonged disruptions could lead to intensifying expectations of rate hikes – though political constraints and the mounting debt burden in the US may limit the Fed’s room to raise. Stagflation risks –which gold has historically responded well to – may rise in this scenario. But for now, liquidity concerns appear to dominate market action. The silver price fell sharply last week with buying support coming in under $70. If that support gives way, the next region of support could be $45-$55. The platinum price remains above its early Feb lows but if that gives way then the next support area is around $1,700. The palladium price has been weaker than platinum and has fallen below the Jan and late Dec lows, and it is back to where it was at the start of Dec.