Following the steep slide that began last week, gold and silver prices staged a rebound on Tuesday. J.P. Morgan noted that dip-buying behaviour is emerging in the market, a pattern commonly seen after asset prices fall by around 20%.

The wave of selling in precious metals was triggered last Friday, when U.S. President Donald Trump nominated Kevin Warsh as the next Federal Reserve Chair. In investors’ eyes, Warsh is a more traditional choice compared with other potential candidates. His nomination eased concerns over the Fed’s independence, which had been under pressure as Trump repeatedly pushed the central bank to cut borrowing costs. Trump had even branded current Fed Chair Jerome Powell a “stubborn mule” for refusing to implement deeper rate cuts.

According to investors and analysts, the crash was likely exacerbated by heavy leverage in speculative positions. Investors who had borrowed aggressively to bet on higher precious metal prices were hit with margin calls and forced to liquidate positions to raise cash.

The plunge in gold also prompted CME Group, the world’s largest derivatives exchange operator, to raise margin requirements on gold and silver futures. Higher margin requirements mean traders can access less leverage, which tends to weigh on precious metal prices in the short term.

The initial spark for this gold rally was the freezing of Russia’s foreign exchange reserves following its full-scale special military operation in Ukraine, which led central banks to ramp up their gold purchases. Today, however, the main driver of gold’s rise has shifted to private investors, who are eager to use gold to hedge against geopolitical uncertainty and the risk of currency debasement in developed markets.

The extent of dip-buying by Chinese investors may prove decisive for the market’s next leg. Over the weekend, buyers flooded into Shenzhen, China’s largest physical gold and silver trading hub, stocking up on jewellery and gold bars ahead of the Lunar New Year.

Most investment banks remain constructive on gold’s recovery prospects. Deutsche Bank said on Monday that it is sticking to its previous forecast for gold to rise to USD 6,000 per ounce this year.

J.P. Morgan stressed that Warsh’s nomination has not fundamentally changed its positioning on gold. The bank still expects gold prices to climb into the USD 6,000–6,300 per ounce range by year-end.

UBS believes that, over the long term, this correction is healthy for the market. This period, in its view, should offer investors an opportunity to build long-term strategic positions at more attractive entry levels.

Market Commentary:

The sharp sell-off in precious metals was a correction that was bound to happen sooner or later, but the fundamental drivers behind their multi-year uptrend remain intact and are likely sufficient to prevent a prolonged, deep decline in prices.Given that global monetary policy is unlikely to tighten aggressively in the near term, and geopolitical risks remain elevated, precious metal prices are more likely to resume a gradual, moderate upward trend rather than enter a sustained bear market.