Gold and Silver Face Sharp Selloff as Central Banks Signal Tighter Policy Ahead

Today’s trading session saw a dramatic reversal in precious metals markets, with gold tumbling over 4% and silver plummeting more than 8% amid renewed selling pressure. The sharp decline comes as CME margin requirements were hiked, triggering cascading long liquidations across both commodities. Gold futures for February delivery dropped 207 points to mark a 1.5-week low, while March silver retreated from its record peak of $81.85 per troy ounce.

What’s Driving the Precious Metals Selloff?

The immediate catalyst stems from hawkish signals emerging from Japan’s central bank. The summary of the December 19 Bank of Japan meeting revealed that policymakers believe Japan’s real interest rates remain substantially low, implying further rate hikes are forthcoming. This development rattled gold traders, who had previously viewed the BOJ as accommodative, and sparked margin calls that accelerated the downward spiral.

The dollar index showed minimal movement today, edging down just 0.03%, but the currency’s trajectory tells a more nuanced story. After rallying on stronger-than-expected November pending home sales data (+3.3% versus +0.9% forecast), the dollar surrendered gains following a weaker Dallas Fed manufacturing report. General business activity fell to -10.9 versus expectations of -6.0, signaling softening economic momentum.

Will Dollar Rate Increase Next Week? Market Pricing Shifts

The interest rate outlook remains a critical variable for currency and commodity markets. Currently, traders are assigning only a 19% probability to a 25 basis point rate cut at the Fed’s January 27-28 meeting. However, the longer-term picture reveals persistent dollar weakness, as markets expect the Federal Reserve to implement approximately 50 basis points of cuts throughout 2026. Simultaneously, the BOJ is anticipated to hike by another 25 basis points in 2026, while the ECB is projected to maintain rates unchanged.

Adding to headwinds for the greenback is the Fed’s liquidity injection program. Having commenced $40 billion monthly Treasury bill purchases in mid-December, this accommodation keeps the financial system awash with dollars—typically bearish for the currency. Further weighing on sentiment are concerns that President Trump may appoint a dovish Fed Chair early 2026, with Kevin Hassett reportedly the leading candidate. A more accommodative Fed leadership would likely pressure the dollar and cap interest rate increases.

Currency Markets Reflect Shifting Central Bank Narratives

EUR/USD edged up 0.02% today, with the euro gaining traction as the dollar faltered. European government bond yields declined, with the 10-year German bund yield hitting a 3-week low of 2.824%, narrowing interest rate differentials that typically support the euro. Market pricing shows zero probability of a 25 basis point ECB rate hike at its February 5 meeting.

USD/JPY declined 0.22% as the yen strengthened on the Bank of Japan’s policy signals. Despite the hawkish BOJ commentary, traders currently see zero chance of a rate hike at the January 23 meeting, leaving near-term USD/JPY support vulnerable.

What’s Keeping Precious Metals Supported?

Despite today’s carnage, underlying bullish factors remain intact for gold and silver. Geopolitical risks continue simmering, with US blockades on Venezuelan oil tankers and recent military operations against ISIS targets providing safe-haven underpinnings. Central bank demand for bullion remains robust—China’s PBOC expanded gold reserves by 30,000 ounces to 74.1 million troy ounces in November, marking the thirteenth consecutive month of accumulation. Global central banks collectively purchased 220 metric tons of gold during Q3, up 28% from Q2.

Fund positioning shows gold and silver ETFs held long positions at 3.25-year and 3.5-year highs respectively, suggesting institutions remain net long despite today’s capitulation. These elevated holdings could either signal further downside risk if liquidations accelerate, or provide support if panic selling exhausts itself.

The question of will dollar rate increase next week remains unanswered by current market data, but the trajectory of Fed policy and central bank divergence will likely determine whether precious metals find their footing or face additional losses in coming sessions.