The first few months of this year have been particularly intense for precious metals. Both metals have seen remarkable rallies and reached all-time highs within a few weeks before experiencing a sudden and significant correction

Gold has appreciated by more than 23% since the beginning of the year, reaching highs of $5,600 per ounce. It then corrected by another 12% in two days and subsequently recovered slightly.

Silver has appreciated by more than 60% since the beginning of the year and has subsequently fallen by more than 30%.

This seemingly erratic behaviour is in fact the result of a combination of structural and technical factors that should be analysed with a long-term perspective.

One rally sustained by structural factors

In the case of gold, the upward trend since the beginning of the year has been driven by very solid demand from both central banks and institutional investors. In an environment marked by growing doubts about the sustainability of public debt, the independence of central banks, persistent geopolitical tensions and the need to diversify portfolios that are overly concentrated in financial assets, gold has strengthened its role as a hedging asset. This structural flow of demand has tightened an already rigid supply in the short term and pushed prices to levels that, until recently, seemed difficult to achieve.

A clearly financial component was added to this movement of funds throughout January. Faced with increasing geopolitical and monetary policy risks, many Western investors have chosen to hedge with call option structures on gold. While these strategies are legitimate from a risk management point of view, they have an amplifying effect on prices when the market moves quickly. As gold approached certain key levels, brokers who had sold these options were forced to buy metal to cover their positions, which further accelerated the rise.

The strong increase in gold call options and net open interest reached an all-time high on 28 January, nearly tripling the 2021–2024 average.

Note: Gold options data — the largest gold ETF. Left: Monthly averages. Right: Daily data. Last observation: 2 February (referred to 30 January).

Source: Bloomberg, Goldman Sachs Global Investment Research

The correction: a technical adjustment, not a trend reversal

The subsequent correction, far from disproving the underlying thesis, is mainly explained by specific factors. The announcement of Kevin Warsh's appointment as the future president of the Federal Reserve in the United States suddenly reduced the perception of macroeconomic risk, thus triggering an immediate reaction: unwinding hedges, closing positions and activating automatic sell orders. This reversal of dynamics occurred because the same agents who had bought during the rise began to sell during the decline, sharpening the correction.

From a historical point of view, these types of adjustments are not unusual during long-term bullish phases. On the contrary: they are often necessary to "clean out" excess positioning, reduce accumulated volatility and restore a healthier balance in the market before resuming the underlying trend.

Silver: more volatility

Silver, as usual, has exhibited even more extreme behaviour. Its rally has been more intense and its correction much deeper. Unlike gold, silver is a smaller and less liquid market, with a strong industrial component.

Furthermore, there has been a tense situation on the London Stock Exchange, where stocks have been significantly reduced after many market participants (traders, banks, industrialists and intermediaries) have physically moved silver —and, to a lesser extent, gold— from other locations, particularly London, to the United States as a precaution. This movement did not respond to immediate consumer demand, but rather to the desire to anticipate possible regulatory or commercial changes, especially related to American trade policy and the possibility that silver could be subject to high tariffs.

In addition, the rise in silver has been strengthened by a specific demand from Asia, especially China and India. However, this demand is very price sensitive and tends to fade when prices rise too quickly. When Western financial flows reversed, the lack of liquidity did the rest, resulting in a much more violent correction than in the case of gold.

Looking ahead, high silver prices may also end up having consequences on the balance between supply and demand, favouring substitution in some industrial uses and increasing recycling.

Ultimately, recent volatility does not negate gold's role as a strategic asset in portfolios. Continued purchases by central banks and the trend of funds toward greater diversification into real assets point to solid structural support for prices in the medium term. In the case of silver, however, it is advisable to take a more cautious approach, given that its more cyclical nature and lower liquidity imply significantly more pronounced swings.