Gold extended its losses in a volatile session following Tuesday’s steepest drop in twelve years, as markets assessed that the rally of previous weeks had risen too far, too fast.

The spot price fell below $4,080 per ounce at the start of European trading, after initially dropping almost 3% and then partially recovering. This followed the previous day’s plunge of up to 6.3%, with technical charts indicating that the rally— which had pushed gold to successive record highs in 2025— had reached overbought levels.

“The technical correction is the main culprit,” said Suki Cooper, head of commodity research at Standard Chartered. “Prices have been in overbought territory since early September,” she added, estimating that gold will regain momentum next year.

A sharp halt to the rally

The correction abruptly halted the upward trend that had begun in mid-August. The so-called “debasement trade” — where investors avoid government bonds and currencies to protect themselves from swelling fiscal deficits — combined with bets that the U.S. Federal Reserve (Fed) would deliver at least one major rate cut by year-end, were the key drivers in recent months.

Despite the correction, gold remains up about 55% since the start of the year.

After a quiet start to the rally, investors began taking a more active role, spurred by the “currency debasement” narrative. Images of buyers lining up outside gold shops went viral on social media, while activity in options and futures — popular ways for retail investors to bet on metal prices — soared.

Political and geopolitical factors

Aggressive moves by Donald Trump to reshape global trade, along with heightened geopolitical uncertainty, have fueled demand for precious metals. At the same time, central banks have continued buying gold to reduce reliance on the dollar, while ETFs investing in gold also saw significant inflows.

Citigroup downgraded its recommendation on gold holdings after Tuesday’s plunge, citing concerns over excessive market positioning. Analysts at the bank, including Charlie Massey-Collier, expect further stabilization around $4,000 in the coming weeks.

“The old ‘gold bull market’ narrative — the persistent demand from central banks to diversify away from the dollar — may return, but for now there’s no need to rush,” the analysts noted, adding that prices “have run ahead of the debasement story.”

U.S.–China expectations

The drop coincided with new reports of progress in U.S.–China negotiations after months of tension that had boosted demand for safe-haven assets. On Tuesday, Trump hinted that his upcoming meeting with President Xi Jinping would lead to a “good deal” on trade — though he admitted it might not happen after all.

At the same time, the partial shutdown of the U.S. government has deprived traders of a crucial data source: the weekly CFTC report, which reveals how hedge funds and money managers are positioned in gold and silver futures. The absence of this data increases the risk of exaggerated market moves.

“It was only a matter of time”

According to Bloomberg strategist Ben Ram, “Tuesday’s gold crash was an accident waiting to happen.” He noted that the recent surge in volatility shows hedge funds have begun to question the risk–reward balance after a spectacular year for the commodity.

At 10:28 a.m. in London, the spot price of gold was down 1%, at $4,077.28 per ounce. Silver was 0.6% lower, following the previous day’s 7.1% drop. Platinum rose, while palladium fell further. The Bloomberg Dollar Index remained steady.