Gold Selloff Explained: Why The Yellow Metal Saw Sharp Decline After Record High Prices

Global gold prices experienced their steepest selloff in more than a dozen years on Tuesday, tumbling by as much as 6.3% after hitting a record peak of $4,381.52 an ounce the day prior.

The sudden rout brought an abrupt halt to a furious, weeks-long rally that has still left the precious metal up more than 50% this year.

While global factors drove the steepest rout, the simultaneous price dip in India was primarily attributed to the simple end of the seasonal buying spree following the festive period. Domestically, the price slump was immediate, with gold price falling to Rs 1,22,320 today.

The dramatic plunge was attributed to a blend nce of international and technical factors that collectively led investors to liquidate their positions.

Bloomberg analysts cited overstretched technical indicators, with the 14-day relative strength index having been in overbought territory for much of the previous month, noting that the rally had run too far, too fast.

Market sentiment shifted rapidly due to signs of potential progress in US-China trade talks, which lessened the need for safe-haven assets. Furthermore, a stronger dollar also weighed on the metal, which is priced in the US currency.

Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney, speaking to Bloomberg, noted that the surge in futures contracts traded suggested that investors were liquidating long positions and simply taking profit after achieving "great averages" in recent weeks.

Adding to the instability, the US government shutdown meant traders lacked one of their tools, which is the weekly positioning report from the Commodity Futures Trading Commission. Without this data, speculators may have been more inclined to build large or unstable positions, contributing to the severity of the drop.

The sell-off occurred even as investor interest in the yellow metal reached historic levels. According to global data compiled by Bloomberg, total physically-backed gold exchange-traded fund or ETF holdings climbed to 98.9 million troy ounces earlier this week.

This marked the highest level of ETF holdings since September 16, 2022, highlighting the retail investor frenzy that peaked right as the price suffered its biggest one-day correction in years.

Before the pullback, demand had been fueled by a strategy known as the "debasement trade" a move by investors to protect against runaway budget deficits by avoiding sovereign debt and currencies.

Additionally, bets on a major Federal Reserve rate cut through the end of the year and heightened US-China trade frictions had supported the rally.