Gold and silver face heavy losses, is the crazy trend nearing its end?

Gold and silver experienced a historic plunge on Tuesday, with "high market trading" stimulating a significant rise in USD/JPY, while U.S. stocks showed mixed results.

Spot gold plummeted 5.3% in a single day, briefly falling below $4,100 during the session, and ultimately closing at $4,124, marking the largest single-day percentage drop since August 11, 2020. However, as gold prices have doubled compared to five years ago, the nearly $250 intraday pullback on Tuesday is more than twice that of the past.

In addition to gold, other precious metals that have been performing well recently also faced a setback on Tuesday. Silver dropped over 7% overnight, while palladium and platinum fell by 5.8% and 6.3%, respectively.

Is this a correction of the recent frenzy (profit-taking), or a signal of a mid-term adjustment?

The volatility measure for gold, the Average True Range (ATR), has surpassed $100. With U.S. CPI data set to be released this Friday and the forces of bulls and bears currently more balanced, gold may continue to maintain high volatility for the remainder of the week.

However, it is important to note that historical data shows that once the ATR retreats from its peak, the frenzied rise in gold prices will gradually come to an end and shift to a range-bound or downward trend. For example, the last time the ATR peaked in April this year, gold prices entered a consolidation phase from May to August.

Another indicator suggesting that gold may face a phase adjustment is the ratio of gold prices to the U.S. money supply (M2). This value has reached its highest level since 2011, indicating that compared to the excessive issuance of U.S. currency and ample market liquidity, gold prices are no longer undervalued.

Meanwhile, when comparing gold, with a market value close to $30 trillion, to the virtual currency market, which is nearly $4 trillion, it can be observed that the latter is catching up rapidly. With the shift in the global political and economic landscape, the competitive dynamics between traditional safe-haven assets and emerging assets may become increasingly apparent. Increasing allocation to virtual currencies implies a certain degree of reduction in the allocation ratio to other assets.

Although the release of extreme short-term optimism has led to a sharp decline in precious metal prices, whether gold will undergo a mid-term adjustment remains to be seen. The formation after this week's weekly close may reveal more clues. However, under the expectations of central bank interest rate cuts (weaker dollar) and diversification of investments/reserves (de-dollarization), the medium to long-term trend of gold is still viewed positively by the market.

In other markets, despite optimistic earnings reports from companies like General Motors and Coca-Cola, the U.S. stock market reacted lukewarmly, with the Dow Jones Industrial Average slightly up and the Nasdaq closing down slightly. Following the election of high market early rice as Japan's Prime Minister, the Nikkei index continued to hit new historical highs, with USD/JPY rising 0.78% overnight to reach a one-week high close to the 152 mark The depreciation of the yen indirectly stimulated a rebound in the US dollar index, while other non-US currencies generally declined.

In terms of news, there is uncertainty regarding the meeting plans of the leaders of the US and Russia, as well as those of China and the US. There has been no progress on the US government shutdown.

XAUUSD 4-hour

Source: TradingView

Gold briefly dipped below the $4,000 mark in the early hours of Wednesday, followed by a rebound of nearly $100.

For bulls, it is necessary to observe whether the gold price will form a bullish candle with a long lower shadow on the 4-hour chart, which would signal the potential continuation of the rebound. Key resistance levels to watch above are $4,144 and the $4,190-$4,200 area; a successful breakout of the latter would restore confidence among bulls.

However, under the influence of the double top structure and the bearish daily pattern, the rebound (if it continues) may still face significant pressure, with both the magnitude and strength likely to be limited. If the downward trend continues, it is important to monitor the significant support formed by the upward trend line from August to October and the 20-day moving average in the $4,000/20 area, which will be the last barrier for bulls.

The implied volatility for gold overnight and for the upcoming week is 45% and 33%, respectively, indicating that high volatility may persist.

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