After Tuesday’s big drop, gold prices fell again on Wednesday. -Getty Images
Gold prices fell again on Wednesday, a day after their biggest one-day drop in more than a decade, but history suggests that the decline is likely to be followed by a modest recovery.
Gold for December delivery GCZ25 GC00, the most active contract, rose 56% on the year in Tuesday’s session. It hit a high of $4,398 an ounce in Monday’s trading as investors sought a safe haven from economic uncertainty, inflation risks and lingering U.S.-China trade tensions.
The precious metal fell 5.7% to end at $4,109.10 an ounce on Tuesday as “gold tourists,” or investors who bought the precious metal “for fear of losing” the trade, were squeezed out and money managers rushed to sell to protect their profits.
That one-day decline was the biggest in 12 years. Gold futures later fell another 1.1% to $4,065.40 on Wednesday.
Fawad Razaqzada, market analyst at StoneX, said on Tuesday that the pullback raised the question of whether gold had peaked or was simply undergoing a long-awaited correction. “I guess time will tell,” he said.
Read: The sale of gold is the biggest in years. Is it a bump in the road or have prices gone up?
However, looking at the precious metal’s previous big daily declines of 5% more shows that declines like this one may not have a long-term impact.
Dow Jones Market Data’s analysis of the most active gold futures shows that since 2006 May 24 after a daily drop of 5% or more, prices averaged around 1.82% a month later. The largest percentage increase was 15.46% per month after a 7.3% drop in 2006. on June 13, and the biggest loss was 7.76% for the month after a 5.4% fall in 2006. May 24
“You shouldn’t expect gold and silver to go up in a straight line,” Stefan Gleason, president and CEO of Money Metals Exchange, told MarketWatch. Corrections like this week’s are “healthy and helpful,” he said. “Bull Markets Climb Wall of Worry”.
Gold prices fell amid skepticism about the precious metal’s role as a hedge against the U.S. dollar, one of the most popular 2025 futures. trading strategies called dip trading. This assumes that the value of the dollar may deteriorate, leading investors to rely on gold as an alternative asset.
Money Metals’ Gleason told MarketWatch that the “bearish-trade thesis is still very much intact” and that “it’s foolish to think that the bearish trade is dead just because there was a huge pullback in a terrible and relentless rally.”
But Bannockburn Capital Markets’ Chandler said the pejorative trade mindset was not working. He noted that by almost every metric, the dollar remains overvalued against other currencies.
Investors in general seem to be “somewhat questioning” the logic behind the bearish trade,” Chandler said by phone. “Over the past few days we’ve seen gold fall sharply and the dollar stronger. My understanding of the bearish trade is that the dollar is overvalued by any measure. If the dollar were cheap, it would make more of a bearish trade, but that’s not the case.
Chandler pointed to data from the Organization for Economic Co-operation and Development. The data, which aims to equalize the purchasing power of different currencies by eliminating differences in price levels between countries, shows that the euro EURUSD and the Japanese yen USDJPY are undervalued by more than 50% against the dollar, while the Swiss franc USDCHF is the only G-10 currency that is overvalued against the dollar by just over 18%.
Meanwhile, the ICE U.S. dollar index DXY, a measure of the cash and a basket of six other currencies, remained near 99 on Wednesday, having edged higher since last Friday. The dollar is still very overvalued, and if it gets to its true value, “it’s not really a downgrade,” Chandler said.
Market participants are underestimating the likelihood of a dollar recovery, said Steven Englander, head of G-10 FX research and North American macro strategy at Standard Chartered Bank in New York. Englander said in an email Wednesday that he sees “less scope” for the Federal Reserve to cut interest rates than others do, and that that view ultimately supports the U.S. currency.
In addition, Englander said the U.S. “may be enjoying a jump in productivity” that typically leads to a stronger dollar, while inventory managers appear “very cautious” about selling commodities.
