Gold prices suffered a dramatic weekly plunge, closing at $4,113.05 per ounce on Friday after a $138.77 drop—one of the largest single-week declines on record, according to Bloomberg. The yellow metal, which hit an all-time high of $4,381.52 earlier in the week, fell 6.3% in a single day on Tuesday to $4,082.03, marking the steepest daily drop since 2013. This abrupt reversal ended a bull run that had propelled gold up nearly 30% since April 2025, driven by safe-haven demand amid geopolitical tensions, expectations of U.S. Federal Reserve rate cuts, robust investor interest, and steady central bank acquisitions. The crash has left traders and analysts reassessing the metal's trajectory in a volatile market environment.

The downturn was primarily triggered by overbought conditions in the market, as highlighted by Kotak Mutual Fund manager Satish Dondapati. The rally, which gained further momentum from a $250–$300 surge last week due to fears of a U.S. government shutdown, reached unsustainable levels, prompting a correction. Dondapati noted that the uptrend was underpinned by macroeconomic factors like potential Fed easing and global uncertainties, but the rapid ascent left gold vulnerable to a pullback as sentiment shifted.

Profit-taking by institutional investors exacerbated the slide, with hedge funds reportedly liquidating positions after the extended rally. Bloomberg cited speculation that Chinese banks may have offloaded gold holdings, adding downward pressure, while option traders ramped up bets on put contracts, reflecting growing bearish conviction. This wave of selling aligned with broader market dynamics, where speculative fervour gave way to risk aversion following the peak.

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A potential slowdown in central bank gold purchases emerged as the third key factor, per JPMorgan analysis. Since the 2022 sanctions on Russia, global central banks have been major buyers, bolstering prices amid de-dollarisation efforts. However, the investment bank warned that reduced demand from these institutions could cap future gains, stating, "The biggest risk to bullion's value is a likely decrease in purchases of gold from major central banks across the globe."

Looking ahead, gold's short-term outlook remains volatile and slightly bearish, influenced by uncertainties in global trade policies and the ongoing U.S. shutdown impasse, according to Dondapati. Traders are advised to monitor macroeconomic signals closely, with increased put option activity signalling opportunities for bearish positions in the near term. In the medium to long term, however, structural supports like elevated global debt, persistent inflation, and geopolitical risks are expected to sustain demand, potentially setting the stage for renewed upside if current headwinds subside. Investors should consider diversified strategies, such as hedging through options or awaiting clearer Fed guidance before placing aggressive bets.

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