A "flash crash" of precious metals triggered by leverage and liquidity

On October 22, 2025, the international financial market once again drew attention due to the sharp fluctuations of precious metals. The spot price of gold in London plunged 5.19% in a single day after hitting a historical high of $4,130 per ounce, reaching a low of $4,075 per ounce. The silver market also experienced a "roller coaster" ride. Spot silver dropped from a high of $52.58 per ounce to $47.85 per ounce, with a single-day decline of 7.03%. This fluctuation not only set a new record for the largest single-day decline in five years, but also exposed the vulnerability of safe-haven assets amid the interweaving of liquidity crises and speculative frenzy.

The recent sharp adjustment in the precious metals market is essentially a concentrated release of multiple contradictions. From a macro perspective, as the US government shutdown enters its 21st day, the deadlock between the two parties over the budget bill has led to the delay in the release of key economic data such as the PPI, causing a sharp divergence in market expectations regarding the monetary policy path of the Federal Reserve. On the one hand, some institutions believe that the shutdown will force the Federal Reserve to maintain a loose stance, pushing the gold price to a new high of $4,380 per ounce on October 20. On the other hand, as the US dollar index rebounded to the 98.9 mark on October 21st, the opportunity cost of holding gold rose, and speculative funds began to withdraw on a large scale.

The deeper contradiction is manifested at the level of market structure. The inventory crisis in the silver market in 2025 became the trigger - the inventory of the London Bullion Market Association (LBMA) was drained, the silver borrowing rate soared to an annualized 15%, while the non-commercial net long position of COMEX silver futures remained at a historically high level. This abnormal structure of "shortage of physical goods + congestion of derivatives" makes any slight change in liquidity likely to trigger a stampede. On the early Asian trading session of October 21st, when some arbitrage positions were forced to close due to margin calls, the price of silver plunged by 8.7% within 30 minutes, marking the biggest intraday decline since 2021.

In this round of the precious metals market rally, the role of speculative capital in fueling the trend has been significant. Data shows that in the first three quarters of 2025, the global silver ETF holdings soared by 47%, with a net inflow of 1,200 tons in September alone, far exceeding the historical average. This influx of funds not only drives up prices but also distorts the market pricing mechanism. Take COMEX silver futures as an example. The ratio of its open interest to the spot inventory in London has soared from 3.2 times in 2024 to 6.8 times in 2025, meaning that for every ounce of physical silver, a derivative position of 6.8 times is required.

When market sentiment reverses, the counterproductive effect of leverage quickly emerges. On October 21st, as the VIX panic index rose from 18 to 24, program trading began to sell off positions in precious metals in a concentrated manner. The trading records of a large hedge fund show that it closed all its long positions within 30 minutes after the silver price broke through the key support level of $51 per ounce. This chain reaction led to a 4.2% plunge in the price within 15 minutes. What is even more alarming is that some institutions have intensified market volatility by taking advantage of loopholes in the delivery rules through the arbitrage strategy of "spot hoarding + futures short selling".

Standing at the crossroads of 2025, the sharp fluctuations in the precious metals market present both challenges and opportunities to restructure investment logic. When traditional analytical frameworks are hit by liquidity black swan events, investors need to establish a three-dimensional analysis system of "macro expectations + market structure + regulatory dynamics" even more. As Dalio, the founder of Bridgewater Associates, put it, "During the transitional period of the monetary system's reconstruction, precious metals are both risk indicators and value anchors, but they are by no means simple safe-haven tools." This storm will eventually pass, but the lessons it leaves behind will profoundly change the investment paradigm of the future.