SunSirs: Multiple Factors Underpin Precious Metals' Long-Term Uptrend, Making Reversal Unlikely

From late January to early February, gold and silver prices on both domestic and international markets experienced sharp declines, with COMEX gold and silver futures plunging by over 20% and 40% respectively at one point. In terms of volatility, gold and silver prices had previously hit record highs repeatedly, accompanied by widening volatility. The sharp decline in gold and silver prices stemmed from factors including overcrowded long positions, a temporary easing of safe-haven demand, and market concerns over the Federal Reserve's monetary policy. However, the long-term upward trajectory of gold and silver prices remains intact. The market has not experienced a dollar liquidity crisis. The Fed's future policy intent to suppress interest rates in coordination with the U.S. government's debt-reduction efforts will not change due to the Fed chair transition. Furthermore, global central bank gold purchases, investment demand, the hedging attributes against beta risk, and the monetary attributes under the evolving international governance system will continue to support gold and silver prices.

Multiple Factors Converged to Cause the Plunge

Recently, gold and silver prices experienced a sharp decline driven by multiple factors.

First, the market had become extremely crowded with long positions. Any correction would trigger a severe correction. Before the plunge, precious metals had become “the world's most crowded trade.” Both institutional investors and retail traders held substantial long positions. Moreover, long positions in gold and silver extended beyond futures contracts to include physical stockpiling by some institutions in the spot market.

Second, safe-haven buying has subsided. The VIX index, reflecting market fear, dropped to 16.88 on January 29. Generally, a VIX above 20 indicates market panic. Concerns over the Iran situation eased as both the U.S. and Iran signaled willingness to negotiate.

Third, concerns over the Federal Reserve's monetary policy. On January 30, U.S. President Trump announced via social media the nomination of former Fed Governor Kevin Warsh as the next Fed Chair. Warsh's policy stance of “interest rate cuts + balance sheet reduction” temporarily reversed expectations of continued liquidity easing, sparking investor anxiety about the Fed's future monetary policy direction. Historically, Wash's monetary policy stance has leaned somewhat hawkish, as evidenced by his policy statements and voting patterns during his tenure at the Fed.

Fourth, exchanges raised margin requirements, increasing transaction costs and significantly cooling the gold and silver markets.

Gold-Silver Ratio at Historically Low Levels

During this adjustment phase, gold and silver exhibited distinct characteristics and drivers in price volatility, resulting in differing correction magnitudes. First, in 2025, silver prices surged more than gold, with COMEX silver futures rising nearly 130% compared to a 55.5% increase in COMEX gold futures. Such rapid price surges tend to attract retail investors chasing gains, making them more susceptible to extreme panic during corrections. Second, both gold and silver price increases were driven by investment demand amid global monetary easing. While silver's rise was also fueled by physical supply gaps, its monetary and safe-haven attributes remain weaker than gold's. Finally, historical data shows silver's price volatility consistently outpaces gold's, regardless of market conditions.

Regarding the gold-silver ratio, after recent sharp declines in both metals, the indicator stands around 60—a historically low level—suggesting limited downside potential for gold. For silver, further price declines appear constrained, as growing demand from the photovoltaic sector underpins its value. Recent corrections may simply be squeezing out speculative bubbles. Silver prices are likely to continue rising until the physical supply gap is resolved.

Upside Potential Ahead

Looking ahead, multiple factors point to potential gains for both gold and silver prices.

First, the market has not experienced a dollar liquidity crisis. This scenario would neither prompt Fed intervention nor trigger sustained, large-scale sell-offs in gold and silver. Data shows that on January 29, the Federal Reserve's overnight reverse repurchase agreement (RRP) utilization reached $2.852 billion, a 158% increase from the previous trading day's $1.103 billion. The RRP aims to absorb excess liquidity in the market and support short-term interest rates.

Second, the incoming Fed Chair is unlikely to alter the central bank's accommodative monetary policy stance. Wash's advocated policy mix of “rate cuts + balance sheet reduction” does not signify pure monetary tightening, but rather emphasizes the Fed's policy boundaries and reduced market intervention. Balance sheet reduction aims to mitigate distortions caused by unconventional monetary measures. Wash's support for balance sheet reduction could create more room for future rate cuts. Additionally, the Trump administration's implementation of the “Big and Beautiful Bill”—including tax cuts and tariff hikes—cannot reduce the government's debt ratio. Consequently, accommodative monetary policy is needed to support government debt resolution. Upon assuming the Fed chairmanship, Wash will also need to align with the Trump administration's debt resolution efforts.

Third, the global central bank gold buying driven by de-dollarization represents a long-term positive trend that will not fade. Currently, the international governance system faces challenges, and central banks worldwide have elevated their demand for “strategic autonomy” to unprecedented levels. As the sole “non-sovereign credit asset,” gold's status within reserves continues to rise. Global central bank demand for gold remains robust, with some nations even incorporating silver into their national reserves.

Fourth, investment demand provides momentum for price increases. The current growth in gold investment demand likely stems more from allocation needs. Global governance reforms, frequent geopolitical risks, high debt levels in Europe and the US, and slowing economic growth stand in stark contrast to the sustained rise in European and US stock markets. This signals increasing risks of equity asset bubbles. Institutions need to allocate to assets with low correlation to equities and strong safe-haven attributes to hedge portfolio beta risk, while individual investors require gold to preserve and grow their assets. Holdings in gold and silver ETFs reflect the strength of investment demand for these metals. Despite the recent sharp decline in gold and silver prices, ETF holdings have not plummeted. As of February 2, the world's largest gold ETF, SPDR, held 1,083.38 tons of gold, down 3.15 tons from 1,086.53 tons on January 29. The world's largest silver ETF, SLV, held 16,546.59 tons of silver, up 1,023.23 tons from 15,523.36 tons on January 29.

Overall, excessive market crowding was the primary driver behind the sharp decline in precious metal prices, while fading safe-haven demand and concerns over the Federal Reserve's monetary policy constituted only short-term disruptions. Looking ahead, the safe-haven and monetary attributes of precious metals will continue to provide support for their prices.

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