(Asia Financial Observer correspondent, Tokyo, February 9)
Gold prices rebounded sharply on February 3. After a steep sell-off the previous day, the market saw a clear reversal, with bargain-hunting demand heating up rapidly.
In gold futures trading on the Osaka Exchange, the circuit breaker—temporarily halting trading—was triggered again following the previous day’s suspension. Behind the violent swings in precious metals prices lies the expanding influence of “paper gold” trading, such as exchange-traded funds (ETFs) and other securitized instruments.
The London spot price, a key international benchmark for gold, briefly fell to USD 4,403 per troy ounce (about 31.1 grams) on February 2, marking a drop of as much as 21% from the January 29 peak of USD 5,594.
During the Asian trading session on the 3rd, prices rebounded, returning to the USD 4,900 range…
We need to look beyond the surface to grasp the essence.
On the surface, this is a story of sharp rises and plunges. In reality, it is “paper gold” driving the rhythm.
The direct catalyst behind this bout of extreme volatility was neither physical gold nor jewelry demand, but securitized gold trading—represented by gold ETFs, futures, and derivatives—commonly referred to as “paper gold.”
“Paper gold” has several critical characteristics: high leverage, rapid turnover, massive capital flows, and strong sentiment-driven behavior. Once market direction flips, stampede-style trading can quickly emerge.
As for why we saw a “sharp drop one day and a sharp rally the next,” the core logic can be summed up in one sentence: the previous day’s decline was not a rejection of value, but a position purge.
This was not a bearish reassessment of gold, but a wave of systemic selling. The circuit breakers on the Osaka Exchange are a textbook example of liquidity vanishing in an instant.
On the following day, dip-buying combined with short covering took over. After panic selling was exhausted, long-term capital judged the sell-off as overdone. Hedge funds moved to cover short positions, and ETF inflows resumed. The result was a V-shaped rebound, with buy orders suddenly clustering. This was not a fundamental shift—it was a structural shift in positioning.
So why was the Japanese market particularly volatile?
The frequent circuit breakers in Osaka’s gold futures have several specific reasons. First, yen exchange-rate fluctuations amplify gold prices in local currency terms. Second, retail investor participation in futures trading is relatively high in Japan. Third, short-term and leveraged trading is highly active. The triple resonance of price × exchange rate × leverage makes circuit breakers much easier to trigger.
In this sense, gold is temporarily shifting from a “safe-haven asset” to a “high-volatility financial asset.” ETFs and derivatives act as amplifiers rather than the original source of volatility.
We are now at a crossroads: can this powerful technical rebound evolve into the starting point of a new uptrend?
Why does the rebound appear more technical in nature? Consider the facts: a maximum drawdown of about 21% from peak to trough, an extremely short time span, and the presence of circuit breakers and liquidity droughts. Taken together, the current episode looks far more like a position-driven sell-off than a fundamental reversal.
Put differently, there is no sign that a new, clearly defined macro bullish factor is being priced in. It is not because “the world suddenly became more dangerous,” nor because “the monetary system suddenly loosened.” It is simply because the market had just sold off too aggressively.
