Why gold and silver crashed, wiping out trillions
While early media narratives focused on speculation surrounding US President Donald Trump’s announcement of a new Federal Reserve chair Kevin Warsh, market participants point to more technical and structural causes behind the move
03 February, 2026
TT
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The sudden collapse in gold and silver prices that erased trillions of dollars in market value was not driven by a single headline or political announcement, but by a tightly wound mix of leverage, margin pressure and market structure failures that finally snapped in late January.
After months of relentless gains, precious metals reversed sharply between January 27 and February 2, triggering one of the steepest sell-offs in decades. Silver fell from highs of around $121 an ounce, while gold retreated from peaks near $5,597, dragging futures, ETFs and spot prices sharply lower.
While early media narratives focused on speculation surrounding US President Donald Trump’s announcement of a new Federal Reserve chair Kevin Warsh, market participants point to more technical and structural causes behind the move.
According to Vijay Valecha, chief investment officer at Century Financial, the sell-off was primarily driven by two decisive triggers: a rapid tightening of margin requirements in the US futures market and an emergency trading halt in China.
“The main triggers for the sell-off in metals were: one, an increase in margins, and two, a trading halt in China,” Valecha said.
Margin pressure created a forced unwind
In mid-January, the CME Group shifted from a fixed-dollar margin system to a percentage-based margin framework. The change significantly increased the amount of collateral required as metal prices rose, effectively capping leverage just as prices were hitting record highs.
“This increase in collateral requirements relative to the contract value effectively caps leverage as prices rise,” Valecha explained. “The capital required to maintain a single COMEX contract rose in tandem, creating an environment in which even minor price declines would trigger massive margin calls.”
Lale Akoner, global market analyst at eToro, said the rally had become increasingly vulnerable as positioning grew crowded across financial instruments. “The rally had become over-owned through bullion ETFs, leveraged futures and call-option structures that mechanically amplified upside,” she said. She added that news around Kevin Warsh potentially being nominated as Federal Reserve chair strengthened the dollar and shifted policy expectations, “triggering forced selling as liquidity thinned.”
By January 27, CME raised maintenance margins again to ensure “adequate collateral coverage” amid extreme volatility. In total, five margin hikes were implemented within ten days, creating what Valecha described as a “coiled spring” of latent selling pressure.
As prices began to dip, leveraged investors were forced to either inject fresh capital or liquidate positions, accelerating the sell-off across COMEX futures and exchange-traded funds.
China trading halt added fuel to the fire
The second major shock came from China. On January 30, the Shenzhen Stock Exchange imposed a full-day emergency trading halt on the SDIC Silver Futures Fund, mainland China’s only publicly traded fund dedicated to silver futures.
“This suspension created a liquidity trap for Chinese institutional and retail traders,” Valecha said. “They were unable to liquidate their domestic holdings and were forced to dump SLV and COMEX futures to raise cash or hedge their exposure.”
The halt effectively trapped capital onshore, forcing offshore selling to meet margin calls, amplifying pressure on already fragile futures markets.
Akoner added that China remains the key near-term variable for precious metals. “Physical demand remains firm, with Shanghai prices at a premium and strong jewellery and bar buying ahead of Lunar New Year,” she said, adding that near-term price action is likely to remain volatile “until forced selling clears.”
Was this manipulation or spoofing?
The speed and scale of the decline reignited speculation about market manipulation, spoofing and coordinated selling, especially given the long history of regulatory action in precious metals markets.
Gold and silver trade in highly financialised, derivative-heavy ecosystems, particularly on COMEX and through the London over-the-counter market linked to London Bullion Market Association. Daily paper trading volumes routinely exceed physical supply multiples over.
“In such an environment, a large sell programme from a macro fund, CTA or bank desk can trigger stop-loss clusters, margin calls and systematic trend-following models flipping short,” Valecha said. “This creates a self-reinforcing liquidation spiral.”
US regulators have previously fined traders at major banks for spoofing — the practice of placing large fake orders to influence prices before cancelling them — in precious metals futures. However, there is no confirmed evidence of coordinated wrongdoing linked to this specific crash.
“Spoofing can accelerate a move, not create the macro trend,” Valecha noted. “What we usually see is a more mundane mix of crowded trades, leverage and automated selling feeding on itself.”
Impact on investors and the Gulf region
The sharp correction reflects a leverage-driven risk reset, rather than a breakdown in precious-metal fundamentals, according to analysts cited by Bloomberg and Reuters.
Akoner said underlying demand dynamics remain supportive, particularly from central banks. “Central banks continue to anchor demand, with roughly 800 tonnes of buying expected in 2026,” she said, noting that purchases are increasingly targeted in tonnes rather than value, making demand more price-inelastic. She added that combined investor and central-bank demand averaged around 750 tonnes per quarter in 2025, well above the roughly 380 tonnes historically required to support higher prices.
Silver bore the brunt of the sell-off due to concentrated futures positioning, but gold was pulled lower as professional investors reduced exposure amid heightened volatility.
In the UAE, the global rout translated into a swift correction in local prices. Dubai gold prices fell by more than Dh100 per gram, sliding to around Dh553 per gram from Dh589, mirroring international futures markets rather than weakening physical demand.
“This type of decline often lures physical buying from jewellery consumers and long-term investors throughout the Gulf,” Valecha said.
The move also underlined a key lesson for regional investors: futures markets can become temporarily decoupled from physical supply-demand dynamics. Violent downside moves do not necessarily signal the end of a cycle.
“Typically, liquidations like this have marked a position reset rather than the end of a bull phase, particularly when physical demand has held up,” he said.
Akoner cautioned that silver may remain more vulnerable in the near term. “Silver is different, as it remains more fragile after a speculative overshoot,” she said. “Unlike gold, silver lacks central-bank dip buyers and is more exposed to positioning, seasonal effects around Chinese New Year, and shifts in industrial demand.” She added that further volatility is likely as positioning normalises, and said eToro prefers to wait for clearer signs that excess leverage has fully washed out before re-engaging.
Read: Gold, silver slide as CME hikes margins after brutal selloff
What happens next
Valecha argues the crash was ultimately a leverage-induced failure, driven largely by overextended Chinese futures positioning colliding with tighter margin rules.
“The crash in silver and gold prices from their highs is purely due to overleveraged Chinese positions, and the fundamental bullish stance on both remains,” he said.
Silver remains structurally tight, with a supply deficit of around 9 per cent in 2025, projected to widen significantly by the end of the decade. Gold continues to see strong central-bank demand, while technically both metals have bounced from key moving averages.
Looking ahead, volatility is likely to remain elevated. Rising real yields, particularly if balance-sheet reduction accelerates under a more hawkish Fed stance, could pressure commodities in the near term. But for long-term investors, sharp corrections may offer staggered entry opportunities rather than signalling the end of the precious-metals cycle.
