From Record Highs to Major Decline - Behind the Scenes of the Gold Price Plunge: Three Factors and Future Outlook

Introduction: From the Frenzy of High Prices to a Cold Splash

On October 26, NDTV reported that gold's "record rally" reversed, ending the week on a downward trend. Spot prices plummeted 6.3% midweek, falling from the previous day's all-time high of $4,381.52 to $4,082.03, and remained in the low range at $4,113.05 by the weekend. This marked a significant weekly decline, comparable to adjustments seen since 2013. Beyond the numerical impact, it was a moment when the market's "main player" shifted from a safe asset to a source of risk. NDTV Profit

What Happened: Three Pressure Points

NDTV outlines the "three factors of the plunge" as (1) overbought conditions, (2) profit-taking and derivatives factors, and (3) concerns over a slowdown in central bank purchases. A roughly 30% rise since April and a recent surge of several hundred dollars stretched technicals to their limits, prompting short-term funds to close positions. An increase in put options was observed in the options market, indicating rising demand for downside protection. Additionally, the perception of a "pause" in central bank gold purchases, which had accelerated in the sanction environment since 2022, led to a decline in confidence in the mythologized "solid buying." NDTV Profit

This framework aligns with reports from other media. The main causes were the unwinding by speculators and the reaction to overheating, with the more than 6% drop from the previous day's high being noted as "the largest in over a decade." Even during the rebound the following day, volatility continued, with fluctuations of 2.9%. The short-term theme is "stabilization after the shock." Investopedia

Factor ① Overbought: Technical "Exhaustion"

Gold has risen significantly since the beginning of the year. In the high price range, trend-following CTAs and ETF money flowed in like a snowball, reinforcing momentum. However, as a sense of accomplishment spread with the new high at the beginning of the week, it triggered a reversal. The Financial Times also emphasizes the technical adjustment aspect of overheating. In short, "it went up too much, so it went down," but the scale was such that it became the "largest reversal." Financial Times

Factor ② Profit-Taking and Derivatives: The "Accelerator" of Selling

On the day of the sharp drop, the board likely saw an expansion of price movements due to hedge fund profit-taking, stop-loss triggers, and the acceleration of put gamma. NDTV reports on "hedge fund profit-taking," "suspected selling by some Chinese banks," and "increased demand for puts." Regardless of the truth, the observation articles themselves indicate a market environment prone to amplifying unstable sentiment. NDTV Profit

Factor ③ Concerns Over Slowing Central Bank Purchases: A Breather in Structural Buying

Central bank buying has been a symbol supporting the recent surge in gold prices. However, the view that "the biggest risk is a slowdown in central bank buying" has emerged. While it is premature to overlay this with the "beginning of the end," it is certain that expectations for structural demand were temporarily shaken. NDTV Profit

The "Eyes" of Social Media: How Investor Sentiment Moved

Highly real-time social media reflects the psychological map of this shock.

• Cautious Investors: Posts with a calm long-term perspective, stating "Gold has a history of suddenly adjusting 40-60% and then slowly recovering." Voices warning against excessive leverage were also prominent. Reddit

• Short-Term Traders: Many posts quickly updated targets for breakouts and breakdowns based on technical divisions (e.g., the battle at $4,210/$4,200), reflecting the tug-of-war between profit-taking and contrarian strategies. Reddit

• Bullish Continuation Advocates: Voices reaffirming long-term bullishness with the new high remained, viewing the adjustment as a buying opportunity. The narrative of "structural bullishness" persists against the backdrop of the year's rise. Reddit

• Breaking News Influencers: Posts spreading the news of the sharp drop as "since 2013" highlighted volatility through the mutual amplification of news and social media. Instagram

Was There a "Misallocation"? Checking with Data

The core facts largely align. The sharp drop occurred on October 21 (Tuesday), with a decline of approximately **6.3%** from the previous day's all-time high. The closing price and weekly base were also weak. This evaluation of the "largest single day" is corroborated by reports from Investopedia, FT, and Bloomberg. In other words, both the "news flow" and "price action" peaked simultaneously. Investopedia

Three Perspectives to Be Cautious Of (Not Investment Advice)

1. Volatility Regime Shift
   After the sharp drop, there was a rebound of 2-3% the next day. In the short term, it is a composite market of "trend × volatility." Set shallow limits, keep sizes small, and get news quickly. Bloomberg

2. Dual Structure of Demand
   The "real demand" from central banks and jewelry, and the "flow" from ETFs and futures are the two pillars of the market. This time, the latter led to an expansion of fluctuations. FT cites the increasing weight of ETFs as a warning indicator. Financial Times

3. Complexity of Macro Catalysts
   Gold is a portfolio insurance for "inflation/debt/geopolitics/monetary policy." The next wave will be determined by which of these calms down and which reignites. Reports highlight the complexity of factors working both up and down, including uncertainty in U.S. policy and expectations for progress on government shutdown issues. Investopedia

Strategy Memo: Short-Term, Medium-Term, Long-Term

• Short-Term (up to a few weeks): The key is "stabilization" in the $4,100-$4,200 range. Adopt a dual approach of selling on rebounds and buying on dips (with hedging), and use options to leverage volatility during rapid changes. Bloomberg

• Medium-Term (up to six months): Until "reacceleration" of central bank buying and "re-inflow" of ETF flows are visible, incorporate the risk of range expansion. Sensitivity to headlines regarding central bank trends will remain high for the time being. NDTV Profit

• Long-Term (over a year): The scenario of high debt, geopolitics, and low stable real interest rates supports the "insurance" value of gold. It is premature to conclude a long-term downtrend like in 2013. Multiple sources suggest that "the long-term bullish narrative is maintained." Financial Times

Conclusion: The "Coexistence" of Myth and Reality

This shock exposed the true face of the gold market, where **myth (absolute safe asset) and reality (flow-driven fragility)** coexist. Overheating, profit-taking, and a slight doubt about "structural buying" combined to create a historic day. However, volatility is both a risk and an opportunity.What drives people to buy gold, and what drives them to sell it—only those who diligently follow the switches of supply, demand, and policy will catch the next wave in time.

Disclaimer: This article is intended for informational purposes and does not constitute a recommendation for specific investment actions. Investment decisions should be made at your own risk.