Gold's plunge last Friday was not the end of its predicament. This is because, even after Friday's sharp drop, gold investors maintained high enthusiasm. This lack of bearish fear has led contrarian analysts to believe that gold has more room to fall.



According to the average recommended gold market exposure level of a sample of dozens of gold market timing traders monitored by a performance auditing firm (this average is represented by the Hulbert Gold Communications Sentiment Index, or HGNSI), before Friday's sharp drop, the HGNSI was at a level almost unseen in the past 25 years—the 99.7th percentile of the daily distribution since 2000. The HGNSI only declined slightly on Friday, so it remains above 84.4% of trading days since 2000. A contrarian "buy" signal appears when this percentage is below 10%.

Listen to the voices of the contrarians

Contrarian analysis is particularly useful in situations like this, because without it, a drop like last Friday would be a mystery. Analysts are forced to look for fundamental explanations. But in the current circumstances, they will likely find nothing: there were no changes in the fundamentals of gold last Friday to justify the day's plunge.

For example, some analysts speculate that inflation expectations must have declined last Friday—possibly in response to President Donald Trump's nomination of Kevin Warsh as the next Federal Reserve chairman. If so, this could explain the drop in gold prices, as gold is generally seen as an inflation hedge, and Warsh is considered an inflation hawk.

However, the evidence does not support this. Take the break-even inflation rate, for example. This is the interest rate investors would pay if they held no difference between nominal Treasury bonds and Treasury Inflation-Protected Securities (TIPS). This break-even rate represents the market's collective assessment of the magnitude of inflation over the next few years. Last Friday, both the 5-year and 10-year break-even rates rose—ruling out the possibility of a sharp drop in gold prices due to lower inflation expectations. According to the latest data, the 10-year break-even inflation rate as of February 2, 2026, is 2.35%, slightly higher than the previous week, indicating that market expectations for inflation are actually strengthening, not weakening.

Duke University's Fox Business School finance professor Campbell Harvey agrees that attributing Friday's decline to Warsh's nomination is a "red herring." Harvey, who has recently authored several studies on the role of gold in investor portfolios, wrote in an email over the weekend that attributing Friday's drop to Warsh's nomination is "distraction nonsense." Furthermore, several analysts point out that while Warsh's nomination is seen as relatively independent of Trump's dovish policies, his recent support for interest rate cuts is unlikely to fundamentally undermine gold's long-term appeal.

Other analysts speculated that economic policy uncertainty may have decreased significantly last Friday. This could also explain the decline in gold, as gold is also seen as a hedge against such uncertainty. However, the evidence again does not support this possibility. Although the Economic Policy Uncertainty (EPU) index is highly volatile on a daily basis and therefore contains a lot of noise, I noticed that there were nine days in January when the EPU was below the end-of-month level—but gold did not plummet on those other days. According to data from the St. Louis Fed, the EPU index averaged 227.41 in January 2026, above the historical average, but volatility shows that it retreated after reaching a high of 533 on January 25, which does not perfectly match the movement of gold prices, further proving that fundamentals are not the only driving factor.

To further illustrate this, gold prices plummeted from a high of nearly $5,600 to $4,745 last Friday, a drop of almost 10%, while silver prices plunged 31.4%, erasing most of their gains in 2026. This collapse triggered a chain reaction in mining stocks, highlighting the forced liquidation of overcrowded positions in the market. Analysts such as Suki Cooper of Standard Chartered Bank pointed out that this selling pressure was due to gold and silver entering "overbought territory," and Warsh's nomination was merely a catalyst. John Steppek of Bloomberg also stated that prices "rose too fast and too hard" and were destined to hit a wall.

In addition, the Chicago Mercantile Exchange (CME) raised margin requirements for gold and silver futures, further exacerbating the liquidation pressure on leveraged long positions, leading to a liquidity event rather than a fundamental reset.

Some institutions believe this plunge may be a healthy correction rather than the start of a long-term bear market. Analysts at Sucden Financial stated that precious metals remain attractive as safe-haven assets and predict a possible mild rebound in the short term. Analysts at UBS and JPMorgan view this as a "shakeout" within a structural bull market, emphasizing that underlying drivers such as geopolitical tensions and global debt remain unchanged.

However, the persistently high HGNSI level suggests that market sentiment has not yet fully turned pessimistic, implying that further selling may be imminent. Historical data shows that a reliable buy signal only emerges when the HGNSI falls below 10%. The current 84.4% level indicates that optimism has only been partially squeezed out, and investors should be wary of further volatility.

in conclusion

The gold market was already rife with euphoria before the crash, and the plunge only released a small portion of that euphoria. Looking ahead to the next few days and weeks, gold prices will remain under pressure, and gold investors will continue to face a challenging market environment.