Year-End Liquidation Triggers Selloff in Precious Metals as Dollar Stabilizes

Precious Metals Face Sharp Pullback Amid Margin Pressures

Precious metals experienced a significant retreat on Monday as year-end positioning adjustments created substantial selling pressure. February COMEX gold futures declined 209.10 points, closing down 4.59%, while March COMEX silver tumbled 6.736 points or 8.73%. The selloff intensified after margin requirements were adjusted, prompting widespread long position liquidations across both gold and silver markets. Silver’s retreat proved particularly steep, pulling back from its recent record high of $81.85 per troy ounce. This represents the steepest decline in precious metals over a 1.5-week period, signaling elevated volatility as traders adjust their year-end portfolios.

Understanding the Precious Metals Pressure Points

The precious metals complex continues navigating conflicting forces. On the bearish side, December 19 BOJ meeting minutes suggested that Japanese policymakers view real interest rates as exceptionally low, implying additional rate increases lie ahead. This prospect weakens the safe-haven appeal typically supporting precious metals during uncertain periods. However, underlying demand remains substantial. Global central banks demonstrated consistent appetite, with China’s PBOC reserves expanding by 30,000 ounces to 74.1 million troy ounces in November alone—marking thirteen consecutive months of accumulation. The World Gold Council reported that global central banks acquired 220 metric tons of gold in Q3, representing a 28% surge compared to Q2.

Exchange-traded funds also show resilience in precious metals exposure. Long holdings in gold ETFs climbed to a 3.25-year high on Friday, while silver ETFs reached a 3.5-year high on Tuesday. These metrics suggest institutional and retail investors maintain conviction despite Monday’s dramatic decline.

Dollar Index Finds Support Despite Mixed Signals

The dollar index rose modestly by 0.02% on Monday, benefiting from stock market weakness that boosted safe-haven demand for the greenback. November pending home sales arrived stronger than anticipated, climbing 3.3% month-over-month versus expectations of 0.9%, providing additional support. However, this upside proved temporary as the Dallas Fed’s December manufacturing outlook disappointed sharply. General business activity fell 0.5 points to -10.9, substantially missing expectations for a -6.0 reading.

The dollar’s longer-term outlook appears constrained by multiple headwinds. Markets are currently pricing a 16% probability of a -25 basis point rate cut at the January 27-28 FOMC meeting. More significantly, forward guidance suggests the Fed may cut by approximately 50 basis points throughout 2026 while the BOJ is anticipated to raise rates another 25 basis points over the same period. The ECB is expected to maintain rates unchanged. Additionally, Fed liquidity injections—including $40 billion in monthly T-bill purchases initiated in mid-December—are weighing on dollar strength.

Political uncertainty adds another complicating factor. Reports indicate President Trump plans to announce his Federal Reserve Chair selection in early 2026, with Kevin Hassett, Director of the National Economic Council, identified as the frontrunner. Markets view Hassett as the most dovish candidate, which would likely create further pressure on dollar valuations.

Euro Retreats on Weak Rate Differentials and Geopolitical Stasis

EUR/USD declined 0.03% on Monday as the euro faced multiple headwinds. Weekend negotiations aimed at resolving the Russian-Ukrainian conflict yielded no breakthrough, maintaining elevated geopolitical premium. Simultaneously, Eurozone government bond yields compressed as the 10-year German bund yield hit a three-week low of 2.824%. This yield compression narrows the interest rate spread between US and European assets, reducing the euro’s relative appeal. Swaps markets show zero probability of a +25 basis point ECB rate hike at the February 5 policy decision.

Yen Strength Pressures USD/JPY Following BOJ Signals

USD/JPY fell 0.35% as the yen appreciated against the dollar. The December 19 BOJ meeting minutes, released Monday, indicated that some policymakers believe Japan’s real interest rate environment remains restrictively low, suggesting further tightening is probable. Lower US Treasury note yields additionally supported yen strength. Markets currently assign zero probability to a BOJ rate increase at the January 23 meeting, though the forward guidance suggests conviction among policymakers about the need for additional rate hikes beyond the immediate term.

Precious Metals: Safe-Haven Dynamics and Central Bank Accumulation

Despite Monday’s sharp decline, precious metals maintain underlying support from multiple channels. Geopolitical tensions continue providing safe-haven incentives, with US military operations against ISIS targets in Nigeria last Thursday and ongoing blockades of Venezuelan-connected sanctioned oil tankers creating uncertainty premiums. The substantial Fed liquidity injection announced December 10—$40 billion monthly into the financial system—theoretically supports precious metals valuations.

Uncertainty surrounding Trump administration tariff policies and regional conflicts in Ukraine, the Middle East, and Venezuela sustains investor interest in precious metals as portfolio hedges. Most importantly, expectations that the Fed will pursue an accommodative monetary policy stance in 2026 under a potentially dovish Fed Chair provide underlying support. Combined with thirteen consecutive months of Chinese central bank accumulation and accelerating global central bank gold purchases, the structural case for precious metals remains compelling despite tactical weakness.

The author had no positions in any securities mentioned at the time of publication. All data is for informational purposes only.