The deep reason for the plunge in gold prices is that the risk of selling has not been eliminated

Friday's plunge is not the end of gold's woes. That is because gold investors remain enthusiastic even after Friday's plunge. This lack of fear of a bear market 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 timers monitored by a performance audit firm (this average is expressed by the Hulbert Gold Communications Sentiment Index, or HGNSI), before Friday's big drop, HGNSI was at a level almost never seen in the past 25 years - the 99.7 percentile of the daily distribution since 2000. HGNSI fell only slightly on Friday, so it remains above the 84.4% trading day since 2000. A contrarian "buy" signal occurs when this percentage is below 10%.

Listen to the voices of the contrarians

Contrarian analysis is particularly useful at times like these, because without it, a drop like last Friday's is a mystery. Analysts are forced to search for a fundamental explanation. But in the current case, at least they will be in vain: nothing changed in gold's fundamentals last Friday to justify the day's plunge.

For example, some analysts have speculated that inflation expectations must have fallen on Friday - possibly in response to recent rumours of a change in Fed officials. If so, that could explain the fall in gold, which is often seen as a hedge against inflation and which officials are known for focusing on.

But the evidence does not support this. Take the break-even inflation rate, which is the interest rate at which investors pay no difference for holding nominal government bonds and inflation-protected government bonds (TIPS). This break-even rate represents the market's collective judgment on the size of inflation in the coming years. Last Friday, the 5-year and 10-year break-even rates rose - ruling out the possibility that lower inflation expectations would cause gold prices to plunge. According to the latest data, the 10-year break-even inflation rate on February 2, 2026 was 2.35%, up slightly from the previous week, indicating that market expectations for inflation are actually strengthening, not weakening.

Campbell Harvey, a finance professor at Duke University's Fuqua School of Business and author of recent studies on the role of gold in investor portfolios, agreed that blaming officials for Friday's fall was a "red herring". In an email over the weekend, he wrote that attributing Friday's fall to officials was "distracting nonsense". Moreover, several analysts pointed out that the official, who is seen as relatively independent of easing policy, has actually supported interest rate cuts in the near future, which may not completely upend gold's long-term appeal. According toBCR ForexAfter the news was announced, market sentiment fluctuated briefly, but the long-term logic did not change.

Other analysts have speculated that economic policy uncertainty may have fallen sharply last Friday. This could also explain the decline in gold, which is also seen as a hedge against such uncertainty. But again, the evidence does not support this possibility. Although the Economic Policy Uncertainty (EPU) index is very volatile on a day-to-day basis and therefore contains a lot of noise, I note that there were nine days in January when the EPU was below month-end levels - but gold did not plunge on those other days. According to the St. Louis Fed, the EPU index averaged 227.41 in January 2026, above the historical average, but volatility showed it retreated after reaching a high of 533 on January 25, which does not exactly match the movement of gold prices, further evidence that fundamentals are not the only driver.

To provide further evidence, gold plunged almost 10 per cent from a high of nearly $5,600 to $4,745 on Friday, while silver plunged 31.4 per cent, wiping out most of the gains in 2026. The crash set off a chain reaction in mining stocks, highlighting the forced position squaring of overcrowded positions in the market. Analysts such as Suki Cooper of Standard Chartered pointed out that this selling was due to gold and silver entering "overbought territory", with official changes only the catalyst. Bloomberg's John Stepek also said that prices had "risen too fast and too hard" and were destined to hit the wall. BCR foreign exchange analysts believe that such extreme moves are often accompanied by emotional selling, and follow-up position adjustments need to be watched.

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

Some think the plunge could be a health correction rather than the start of a long-term bear market. Analysts at Sucden Financial said the long-term appeal of precious metals as safe-haven assets remained and predicted a modest rally in the short term. Analysts at UBS and JPMorgan saw this as a "shock" in a structural bull market, stressing that underlying drivers such as geopolitical tensions and global debt were unchanged.

However, from HGNSI's sustained highs, sentiment has not yet turned sufficiently bearish, meaning more selling could be on the horizon. Historical data suggest that when HGNSI falls back below 10 per cent, it is a reliable buying signal. The current level of 84.4 per cent suggests that optimism has only been partially squeezed out and investors need to be wary of further volatility.

conclusion

The plunge has only modestly released some of the euphoria that prevailed in the gold market before the crash. Looking ahead, gold prices will remain under pressure in the days and weeks ahead, and gold investors will continue to face difficult market conditions.