The anticipated gold crash has occurred, and now everyone is waiting to buy the dip?

This week, the gold market experienced a "collapse that everyone expected." On Tuesday, gold prices plummeted 6.3% during trading, marking the largest single-day drop since 2013.

However, the gold crash on Tuesday does not seem to have triggered panic; instead, it ignited a rush of global retail investors eager to "buy the dip," while the core views of most precious metals analysts remained unchanged.

At the same time, analysts like Michael Hartnett from Bank of America raised concerns, arguing that the logic behind the "devaluation trade" supporting gold prices is not solid, suggesting that the basis for shorting the dollar and going long on gold may not be as robust as imagined.

"Expected" Flash Crash

From the perspective of professionals, this correction was not surprising.

On October 6, Nicky Shiels, the research director at precious metals refiner MKS Pamp SA, warned clients that gold was "a crowded trade that is overextended on all technical indicators." The day before the crash, when gold prices surged toward a historic high of nearly $4,400, Marc Loeffert, a trader at Heraeus Precious Metals, also cautioned that the market "was becoming increasingly overbought."

In fact, data from the New York Mercantile Exchange (Comex) shows that the trading interest in gold put options relative to call options has risen to one of the highest levels since the global financial crisis of 2008.

It is worth noting that the recent drop in gold prices seems to lack a clear external catalyst, with some traders attributing it to profit-taking by hedge funds or selling by banks. Moreover, this storm was almost entirely confined to the precious metals market, with major asset markets such as global stocks, U.S. Treasuries, and crude oil being hardly affected that day.

Retail Investors Flood In, Professional Institutions Remain Bullish

From Singapore to the United States, gold dealers have widely reported a buying frenzy, as it seems global retail investors view the price drop as a rare buying opportunity.

Pete Walden, the deputy CEO of Singapore dealer BullionStar, stated that the company experienced its busiest day ever on Tuesday, "with lines forming before opening, and buyers far outnumbering sellers."

Stefan Gleason from U.S. dealer Money Metals Exchange also mentioned that he was overwhelmed by buyers looking to "pick up bargains."

Meanwhile, the core views of most precious metals analysts have also remained unchanged.

They generally believe this is a "healthy correction" to squeeze out market bubbles. Nicky Shiels, the research director at MKS Pamp SA, stated this week:

"Bull markets always need healthy corrections to clear out the bubbles to ensure the sustainability of the cycle... Prices should consolidate and return to a more robust bullish trajectory." JP Morgan analyst Gregory Shearer stated in a report this week that the profit-taking behavior of investors will be absorbed by other physical buyers, including central banks, who will "buy on dips," ultimately resulting in a relatively limited decline in prices. Shearer predicts that the average price of gold will exceed $5,000 by the fourth quarter of next year.

Looking back, the core drivers of this round of the gold bull market stem from several aspects: first, the large-scale purchases by central banks, a trend that significantly accelerated after the Russian central bank was sanctioned in 2022; second, the deep concerns of global investors regarding the unsustainable levels of sovereign debt; and recently, the influx of ordinary retail investors has further pushed prices higher.

Contrary View: The "currency depreciation" logic supporting gold prices is not solid

Despite the optimistic market sentiment, some analysts have noted warning signs.

Bank of America strategist Michael Hartnett stated that gold has surged 60% by 2025, and the inflow of funds over the past four months has even surpassed the total of the previous 14 years.

From a macro perspective, Hartnett questioned the solidity of the "devaluation trade" logic supporting gold prices. He provided three reasons: first, the yield on 10-year U.S. Treasury bonds is below 4%; second, the U.S. achieved a budget surplus in September; third, the U.S. Dollar Index (DXY), which measures the strength of the dollar, has consistently failed to break below the low point from April. These factors collectively suggest that the foundation for shorting the dollar and going long on gold may not be as solid as imagined.

Even JP Morgan analyst Gregory Shearer, who is bullish on gold, listed "central banks slowing their pace of purchases" as the biggest risk to his bull market forecast in the report.

Additionally, the story from the previous peak in gold prices in September 2011 is worth heeding today. At that time, after gold reached a historical high of $1,921, it fell back, and analysts attending the London Bullion Market Association (LBMA) annual meeting were almost unanimously bullish. However, the result was that gold took a full nine years to return to that high point.