Year-End Liquidation Pressure Hammers Precious Metals as Dollar Stabilizes on Mixed Signals

Precious metals experienced a sharp sell-off on Monday amid intensifying year-end liquidation dynamics. February COMEX gold closed down 209.10 points (-4.59%), posting a 1.5-week low, while March COMEX silver plummeted 6.736 (-8.73%), retreating from its record high of $81.85 per troy ounce. The liquidation momentum accelerated after the CME raised margin levels for trading, which sparked significant long position unwinding across both commodities.

The price collapse in gold and silver came despite several structural support factors remaining in place. Central bank demand continues to underpin the market—China’s PBOC gold reserves increased by 30,000 ounces to 74.1 million troy ounces in November, marking the thirteenth consecutive month of reserve accumulation. Additionally, global central banks purchased 220 MT of gold in Q3, up 28% from the previous quarter. Fund positioning had also strengthened, with long holdings in gold ETFs reaching a 3.25-year high and silver ETF long positions climbing to a 3.5-year high—suggesting the liquidation was a technical correction rather than a fundamental shift in sentiment.

Currency Markets Reflect Divergent Rate Paths

The Dollar Index edged up just +0.02% on Monday, held back by contradictory economic signals and longer-term rate expectations. Stronger-than-expected November pending home sales (+3.3% m/m versus +0.9% forecast) provided initial support, but this was quickly offset by the December Dallas Fed manufacturing survey, which showed general business activity unexpectedly declined by 0.5 points to -10.9, well below expectations of -6.0.

The dollar faces structural headwinds from the FOMC’s 2026 outlook. Markets are pricing in approximately -50 basis points of rate cuts in 2026, while the BOJ is expected to raise rates by another +25 basis points and the ECB is likely to maintain its current stance. The Fed’s ongoing $40 billion monthly T-bill purchases, which commenced in mid-December, are also adding liquidity pressure on the currency. Adding to dollar weakness is the uncertainty surrounding President Trump’s selection of the next Fed Chair, with market participants viewing potential candidates like Kevin Hassett as dovish alternatives that would weigh on currency strength.

EUR/USD declined -0.03% as the euro contended with lower Eurozone government bond yields. The 10-year German bund yield fell to a 3-week low of 2.824%, compressing interest rate differentials and pressuring the currency higher despite geopolitical concerns. The swaps market is pricing zero probability of an ECB rate hike at the February 5 policy meeting.

USD/JPY fell more sharply by -0.35%, as the yen strengthened on multiple fronts. The BOJ’s December 19 meeting summary revealed that some policymakers view Japan’s real interest rate as unusually low, signaling readiness for further rate increases. Lower US Treasury note yields also supported the yen’s advance. Markets currently discount zero probability of a BOJ rate hike at the January 23 meeting, though the longer-term trajectory appears set toward tightening.

Safe-Haven Demand Underpins Gold Despite Liquidation

The gold liquidation pressure on Monday masked deeper structural support for precious metals. Geopolitical tensions continue to provide safe-haven demand, with the US maintaining sanctions enforcement against Venezuelan oil tankers and conducting military operations against ISIS targets in Nigeria. Uncertainty surrounding potential US tariff policies under the Trump administration, combined with ongoing risks in Ukraine, the Middle East, and Venezuela, keep investors focused on precious metals as portfolio insurance.

The prospect of easier Federal Reserve policy in 2026—driven by Trump’s expected appointment of a dovish Fed Chair—offers additional fundamental support for gold prices. This contrasts with tighter global monetary conditions elsewhere, reinforcing gold’s appeal as a hedge against dollar weakness and monetary divergence among major central banks.