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Why Has Gold "Crashed" and Where Is the Bottom of This Downturn?

Regular readers of Little Finance God articles know that since 5200, I've been watching gold form a "double top" pattern decline. I also captured some profits in this downtrend, but yesterday around $70 silver, I chose to go all-in on a bottom-fishing attempt—and the result was predictable: I got liquidated! So how should we handle gold going forward? How should we fish for this bottom?

📉 Let me briefly review the reasons for this round of gold decline:

1. Price rose too quickly in the short term, reducing safe-haven appeal: This is the fundamental reason for this round of gold price decline, and also the true cause of why gold, this "safe-haven asset," is plunging instead of rising despite the ongoing US-Iran tensions. The final rallying wave of this round's gold bull market was severely irrational, with prices inflated. Not only is there massive profit-taking pressure, it also gave shorts excellent reasons to attack. When both forces work together, prices naturally collapse. Additionally, the sharp volatility in gold prices has drastically increased investment risk, eliminating its original safe-haven properties, while taking on characteristics of risk assets—this is why gold is declining against the trend despite the US-Iran conflict intensifying.

2. Inflation-Interest Rate Spiral Pressure: Conflict-driven energy prices intensify "reflation" concerns, forcing markets to reprice global central bank policies. The Fed may extend its high-rate cycle, forming a "geopolitical risk pushes up inflation → strengthens hawkish policy → suppresses gold prices" negative feedback loop.

3. Collapse of Rate-Cut Expectations: As mentioned above, high oil prices driving high inflation make the Fed extremely cautious about rate cuts. Some institutions even predict a possible restart of rate hikes, with traders' betting probability on this event rising to 50%. This pushes the dollar index continuously higher, breaking year-to-date highs and posting the largest two-month gain, while dollar appreciation further pressures dollar-denominated gold.

4. Leveraged Fund Stampede: The rapid price surge in the earlier period accumulated massive profit positions. When prices broke below the key technical support of $5100, program trading stop-loss orders triggered en masse, forming a vicious cycle of "decline → liquidation → further decline." Additionally, global exchanges densely increased trading margins, forcing highly leveraged investors to liquidate, further intensifying selling pressure.

5. Central Banks' Purchasing Momentum Plummets at High Gold Prices: Global central banks' net gold purchases in January were only 5 tons, less than 20% of the average monthly demand in 2025. Slowdown in gold purchases by major reserve nations weakens long-term support and escalates market concerns about demand collapse.

📊 How to Operate Recently?

In the short term, the bears are ferocious, consecutively breaking through the 4800 and 4500 psychological levels, creating the largest single-week decline since 1983 (weekly decline of 10.49%). The only position the bulls can defend below is the 4000 whole number level. Short-term focus remains on selling.

Entry Points: Above 4600

Stop Loss: Above 4800

Take Profit: Around 4000

🙋 Should You Fish for the Bottom?

Regarding bottom-fishing, let me first discuss gold's positioning. Gold, as a globally recognized wealth storage tool with strong liquidity, once held a special position being pegged to the US dollar under the "Bretton Woods System" and serving as a currency reserve. Although this system collapsed long ago, gold's nature as a store of value and even a "general equivalent" is indisputable—different from Bitcoin. While Bitcoin has been incorporated into US strategic reserves, most countries worldwide have not yet adopted it as a wealth storage mechanism. Therefore, although gold may experience significant short-term volatility, it won't crash without "limits" like Bitcoin did previously. Since there are limits, we can certainly fish for the bottom.

Furthermore, since 1900, gold's real returns have shown a positive correlation with inflation relative to commodities. Against the backdrop of persistent global inflationary pressures, gold's anti-inflation properties will provide long-term price support—this is why gold historically exhibits "long bull and short bear" characteristics.

🙋 When to Fish?

However, my painful bottom-fishing experience tells everyone to be cautious. If you truly can't restrain yourself, focus on the 3900-4000 whole number levels. After prices consecutively broke through the 4800 and 4500 psychological levels, the 4000 whole number level becomes the position bulls must defend. Considering that declines usually have momentum, we cannot rule out 4000 breaking temporarily. If this happens, it might be an excellent opportunity to close shorts and go long.

For long-term investors, if you're bullish on gold's trajectory long-term, focus on the following key support levels: 3900 and 3520. The 3900 level represents the Bollinger Band midline support on the daily chart long-term, while 3520 is the starting point of this rally's accelerated surge. Bottom-fishing at this level and holding long-term should generate decent returns. Additionally, note that global gold mining costs have climbed to approximately $310/gram. Adding processing and transportation fees, this corresponds to an international gold price cost line of approximately $4000/ounce. When gold prices approach or fall below this level, mining companies reduce extraction or even halt production, contracting market supply and pushing prices higher. This is similar to Bitcoin mining costs—when prices fall below mining costs, miners shut down and purchase Bitcoin from the market, which often signals where price bottoms form.

🙋 How to Fish?

Counter-trend bottom-fishing is like taking chestnuts from fire—it has gambling characteristics, and "burns" are inevitable. But to control the damage, one must: first, use light positions; second, set stop losses. Short-term traders can adopt a "light position + tight stop loss" strategy, using 10%-20% position size with 2%-3% stop loss; long-term investors can adopt a "medium position + wide stop loss" strategy, deploying 30%-50% position size with 5%-10% stop loss. This combination controls single-trade risk while maintaining capital efficiency.

👉 Finally, Watch These Three Signals Recently

1. Fed's Tolerance for "Oil Inflation": Gold is a zero-interest asset. When US real interest rates rise, the opportunity cost of holding gold increases, causing funds to flow out of the gold market and gold prices to fall. Conversely, when real rates fall, gold rises. At the beginning of 2026, the market unanimously expected the Fed to cut rates 3-4 times within the year, pushing gold prices higher. However, recent US-Iran conflict drove oil prices soaring, dramatically raising US inflation expectations. US economic data shows core PCE inflation and CPI data far exceed market expectations. How long the Fed will tolerate this war-driven inflation and whether it will truly take rate-hike measures have fatal implications for gold and silver prices.

2. Middle East Conflict Developments: If the US-Iran conflict prolongs and duration exceeds Middle Eastern oil producers' storage limits, impacting other Middle Eastern nations, then global energy situation, policy response, and geopolitical conflict expansion face enormous uncertainty. Geopolitical risk could trigger phase liquidity shocks and speculative fund withdrawals. Gold's correlation with other risk assets has strengthened, potentially being affected. However, if conflict duration extends and economic negative impacts gradually manifest, market risk-aversion sentiment will re-intensify, releasing gold's safe-haven demand and pushing prices higher.

3. Whether Central Bank Gold Purchases Return to Normal: Unlike regular investors who "buy more as prices rise," central banks are clearly more rational. Previous irrational gold rallies caused global central banks to slow their purchasing pace. However, if gold prices subsequently fall below $4000/ounce, some central banks may restart normal gold purchases. Then, following the central bank mom in bottom-fishing might be much safer.

What's your view on gold prices? How much are you planning to bottom-fish? Welcome to comment and discuss! Wishing everyone prosperity daily! #XAUT #XAG