Gold Faces Historic Plunge as Dollar Surge and Rising Margins Crush Precious Metals

The precious metals complex experienced a brutal day on Wednesday, with gold and silver entering a steep correction. February gold futures crashed to a 2.5-week low, shedding 1.03% to close -45.20, while silver suffered an even sharper 9.39% decline, plummeting to a 1-week low as March contracts tumbled -7.316. This coordinated collapse reveals the perfect storm facing the metals market right now.

The Perfect Storm: Margins, Dollar Strength, and Yield Pressures

The immediate trigger for the gold plunge came from the CME’s second margin hike in a single week. This forceful move compelled traders to post additional collateral, triggering cascading liquidations among leveraged positions. Simultaneously, the dollar index surged to a 1-week high, climbing +0.07% as US unemployment claims surprised to the downside, falling 16,000 to a 1-month low of 199,000. This stronger-than-expected labor data reinforced the narrative of Fed tightness, even as longer-term policy remains uncertain.

Treasury note yields rose sharply alongside the dollar strength, creating a double headwind for gold and silver, which carry implicit borrowing costs that rise with real rates. The yen fell to a 1-week low against the dollar (USD/JPY +0.21%), while EUR/USD slid to a 1-week low (-0.03%), underscoring broad dollar dominance despite persistent questions about Fed Chair Powell’s political future.

The Fed’s Divided Future: Where Does This Leave Metals?

The uncertainty surrounding the next Fed Chair has created contradictory currents in the markets. While President Trump indicated he “still might” dismiss Powell, Bloomberg reported that National Economic Council Director Kevin Hassett is the leading candidate to replace him—and Hassett is viewed as notably dovish. This prospective dovish shift would normally support gold as a hedge against loose monetary policy in 2026, yet markets are only pricing in a 15% chance of a 25 basis point rate cut at the January 27-28 FOMC meeting.

The FOMC’s December decision to inject $40 billion per month in T-bill purchases adds another layer of complexity. While this liquidity provision should theoretically support precious metals as a hedge against monetary inflation, the near-term technical damage from the margin squeeze is overwhelming these structural tailwinds.

Why Central Banks Remain Steadfast Buyers

Despite the gold plunge, central banks have shown no signs of wavering. China’s PBOC boosted its gold reserves by 30,000 ounces to 74.1 million troy ounces in November—marking thirteen consecutive months of accumulation. Global central banks purchased 220 metric tons of gold in Q3, up 28% from Q2, signaling that reserve managers view gold as a strategic asset regardless of short-term price swings.

Long positioning in gold ETFs climbed to a 3.25-year high just before the correction, with silver ETF longs reaching 3.5-year highs. This suggests that while trading specs are getting flushed out, macro investors still see precious metals as essential portfolio ballast against tariff uncertainty and geopolitical risks spanning Ukraine, the Middle East, and Venezuela.

The Diverging Central Bank Backdrop

Looking ahead, the fundamental case for gold remains mixed. The BOJ is expected to tighten by another 25 basis points in 2026, while the ECB appears ready to hold steady—yet the Fed is expected to ease by roughly 50 basis points. This Fed easing bias, coupled with Trump’s apparent intention to appoint a dovish successor to Powell, should eventually provide underlying support for the precious metals complex. However, the immediate path lower appears well-entrenched as margin pressures and dollar momentum continue to dominate price action.