Gold and silver prices have sharply fallen after their record highs earlier this month, and both these precious metals have experienced their biggest single-day drop in years.
This sudden correction has surprised the stocks and bonds investors and has made them wonder what caused this sudden turnaround of the uninterrupted gains of the last few months. In fact, gold, which set a new record at $4,381 per ounce on 20th October, has gone down close to 10%, and silver has decreased by around 12% from its top of $54.5 per ounce.
There are several factors behind the major retreat in the precious metal prices.
The most prominent reason for the sharp pullback is the extensive profit-taking by investors who have reaped the fruits of the 2025 extraordinary gains. While gold has returned almost 60% to investors year-to-date, silver has jumped by roughly 70%, thus, both metals have been among the best-performing asset classes this year.
Once gold surpassed the psychologically significant $4,000 level and went further up to record heights, investors considered these milestones a perfect moment to realize their profits. Market analysts refer to this event as a technical correction in an overheated market that has been going up for months without any pullback.
The step-down has been extraordinarily severe, as dealers have chosen to cash in their chips after what many have seen as an unsustainable rally in the short-term.
The relaxation of trade tensions between the United States and China has considerably reduced the appeal of gold as a safe-haven asset. US President Donald Trump showed positive attitude towards a fair trade agreement with Chinese President Xi Jinping at their upcoming meeting in South Korea, thus, making a huge turnaround from his earlier threats of 100% tariffs on Chinese goods.
These soothing signs have lessened investor fear of the trade war getting worse, which in turn has led to a move away from safe assets like gold and silver to riskier ones such as stocks.
The market had already factored in a hefty geopolitical risk premium, and as these worries dissipated, the precious metal market had to give back a big part of its gain. The main driver behind this change of market sentiment has been the expectation of a positive outcome in trade talks.
Gold and silver faced additional downward pressure due to the strong US dollar. During the recent price declines, the dollar index advanced 0.4%, which made gold and silver priced in dollars less attractive for buyers from other countries thus limiting the cross-border demand. Typically, the relationship between the dollar and gold is inverse, meaning that when the dollar gets stronger, gold price tends to fall, because the US dollar-denominated commodities become more expensive for people using other currencies.
The dollar effect on gold has been the main reason behind the selling pressure in these markets during the last few days. The dollar's strength, which is in line with expectations for the Federal Reserve's next moves, is not creating a very cozy setting for precious metals lately.
Risk appetite of investors has notably improved lately as a result of positive developments concerning geopolitical situation and expectations of the end of the prolonged US government shutdown. Consequently, this enhanced risk-taking behavior has led to a repositioning of funds away from safety havens such as gold towards stock markets, where higher returns can be achieved in a stabilizing global scenario.
The bull market in stocks has very much been a rival to the existence of precious metals in the eyes of investors, with many of them deciding to shift their portfolios from defensive to offensive stances.
When investors become more optimistic about the economic and political environment, they tend to lower their demand for gold because it is primarily used as a hedge against unpleasant surprises. Thus, the move away from precious metals is indicative of the general economic optimism and lesser need for hedging by both institutional and retail investors.
