Quick overview

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Gold and silver experienced their sharpest selloff in years as investors locked in profits out of concern that the recent historic rally in precious metals had inflated their prices.

Spot silver prices dropped as much as 8.7 percent when technical indicators suggested that previous gains might have been excessive, while gold prices fell up to 6.3 percent, marking the largest decline in over a decade. After a week of record highs for both gold and silver, the market plunge abruptly ended the rally.

Besides the so-called debasement trade, which occurs when investors move away from sovereign debt and currencies to hedge against unmanageable budget deficits, gold had surged largely due to bets that the US Federal Reserve would cut interest rates significantly by year’s end.

Markets expect a future price increase and find strong support between $4,000 and $4,050. “We should be prepared for the next leg higher, driven by ETFs,” as well as flows from central banks in emerging markets. Most traders who drove the bullion rally, breaking all previous records since September, were following market trends, and this type of trading “naturally has the potential to go the other way as soon as we get a few days of prices coming off.