Dip of gold and silver prices: Global market shockwaves, financial losses and strategic lessons

 What Sri Lanka’s investors, businesses, and policymakers must understand

Global financial markets were recently shaken by an extraordinary episode of volatility when gold and silver prices collapsed sharply within a very short span, wiping out an estimated $ 3 trillion in market value in just 90 minutes. The speed and scale of the sell-off stunned investors, triggered fear across asset classes, and exposed the fragility of confidence in today’s highly interconnected global financial system.

Gold plunged to around $ 5,135, while silver declined to nearly $ 109, following a prolonged rally driven by geopolitical tensions, a weakening US dollar, inflation concerns, and strong central bank buying. Once prices reached extreme levels, markets became vulnerable to sudden profit-taking, algorithmic selling, and forced liquidations.

This episode did not remain confined to commodities. It spilled rapidly into global equity markets, weakened investor sentiment, and raised important questions—not only about investment risk, but also about how resulting losses are recognised in financial statements and treated for tax purposes, particularly in Sri Lanka.

Why did gold and silver prices drop so sharply?

Massive profit-taking after extended rally

Gold and silver prices had risen sharply over a prolonged period, supported by geopolitical tensions, inflation fears, heavy central bank buying, and a weak US dollar. As prices reached extreme highs, institutional investors began locking in profits. Once large players started selling, prices fell rapidly—especially in fast-moving markets. Big rallies make markets fragile, and profit-taking spreads quickly once it begins.

Overcrowded trades and one-sided positioning

By the time prices peaked, most investors were already bullish on gold, hedge funds held similar positions, and few new buyers were left. This overcrowded positioning meant that when sentiment shifted, investors rushed to exit simultaneously, triggering sharp price declines even in fundamentally strong assets.

Algorithmic and high-frequency trading acceleration

Modern markets are dominated by algorithmic trading, stop-loss triggers, and momentum strategies. When key technical levels were breached, automated systems sold instantly and stop-loss orders were triggered in bulk. Machines reacted faster than human judgment, accelerating the sell-off far beyond fundamentals.

Margin calls and forced liquidations

Leverage amplified the downturn. Falling prices led to margin calls, and traders unable to meet them faced forced liquidation. This added further selling pressure, creating a vicious cycle in which leverage transformed volatility into a crash.

Gold sold to cover losses elsewhere

During broader market stress, investors often sell liquid assets first to raise cash. Gold, being highly liquid, was sold not because it failed as a safe haven, but because it was easily monetised to meet margin calls or rebalance portfolios.

Shifts in interest rate and dollar expectations

Gold and silver are highly sensitive to global interest rate expectations and US dollar movements. Expectations of higher-for-longer interest rates or a stronger dollar increase the opportunity cost of holding non-yielding assets, reducing demand and putting downward pressure on prices.

Central Bank buying slowed at high prices

Central banks had been strong buyers earlier in the rally, providing price support. However, when prices rose too rapidly, official-sector purchases slowed. The loss of this stabilising demand left prices more exposed to correction.

Panic psychology and speed of modern markets

Once prices began falling, fear replaced confidence. Retail investors followed institutional selling, while news and social media amplified panic. Markets now move in minutes rather than months—speed magnifies fear, and fear magnifies losses.

Why this matters for Sri Lanka

Sri Lanka’s financial markets, though relatively small, are deeply influenced by global capital flows, commodity prices, and investor sentiment. During periods of global risk aversion, foreign investors reduce exposure to emerging and frontier markets, placing pressure on local equity valuations regardless of domestic fundamentals.

Global volatility also shapes expectations around the Sri Lankan Rupee. Heightened uncertainty increases demand for reserve currencies, alters importer and exporter behaviour, and can add pressure on the exchange rate even without immediate trade imbalances.

Sri Lanka is a net importer of gold, particularly for jewellery manufacturing and gem-related exports. Sharp price fluctuations affect import costs, working capital requirements, export pricing, margins, and inventory valuation. While falling prices may temporarily reduce costs, extreme volatility complicates planning in an industry critical to export earnings.

Central Bank and policy implications

Sharp movements in gold prices have significant implications for central banks, especially in economies managing tight external balances. Gold forms part of official foreign exchange reserves, and sudden price swings can materially alter reserve valuations—metrics closely watched by investors, lenders, and credit rating agencies.

Volatile reserve values reduce monetary policy flexibility. Central banks must balance inflation control, exchange rate stability, and economic growth while interpreting gold price movements that often signal shifts in global interest rate expectations. In such conditions, policy credibility, communication, and prudent reserve management become essential.

Accounting for losses in financial statements (Sri Lanka context)

Market shocks inevitably translate into financial losses for companies and investors. Proper accounting treatment under Sri Lanka Accounting Standards (SLFRS/LKAS) is essential for transparency and compliance.

Operating losses arising from core business activities are recognised in the Statement of Profit or Loss, reducing operating and net profit. Investment losses are accounted for under SLFRS 9, either through profit or loss or through other comprehensive income, depending on classification. Impairment losses arise when asset values exceed recoverable amounts, while foreign exchange losses directly affect reported earnings during volatile periods.

Such losses also impact equity, cash flow disclosures, and key financial ratios, making clear and transparent note disclosures particularly important for listed companies.

Tax treatment of losses in Sri Lanka

Accounting losses do not automatically translate into tax losses. Sri Lanka’s tax system follows the Inland Revenue Act, No. 24 of 2017 (as amended), not accounting standards.

Business losses incurred in the production of taxable income are generally deductible, while capital losses, unrealised fair value losses, and losses from exempt or final-tax income sources are not. Business losses may be carried forward, but only set off against profits from the same source. Deferred tax assets may be recognised where future taxable profits are probable, subject to strict scrutiny.

Future strategy for gold and jewellery stakeholders

Gold importers, wholesalers, and jewellery dealers must move away from price speculation toward margin protection, focusing on turnover, cash cycles, hedging discipline, and real-time inventory valuation. Jewellery retailers should shift from weight-based selling to design, craftsmanship, branding, and customer trust, while maintaining pricing transparency and tight working capital control.

Investors should reposition gold as a hedge rather than a bet, limit exposure within diversified portfolios, avoid leverage entirely, and use staggered buying with periodic rebalancing. The general public should separate cultural gold ownership from speculation, avoid panic-driven decisions, and maintain adequate liquidity outside gold.

Conclusion: From tradition to strategy

This episode does not mark the end of gold or silver as valuable assets. It represents a violent correction driven by crowded positioning, leverage, and the speed of modern markets. For Sri Lanka, resilience lies in disciplined investing, transparent financial reporting, prudent tax planning, and coherent macroeconomic policy.

Gold will continue to play a vital role in Sri Lanka’s economy—as a cultural asset, an industrial input, an export-linked commodity, and a financial hedge. However, the era of assuming that prices only rise is over. The future belongs to those who manage risk, add value, diversify wisely, and plan with discipline. In doing so, volatility can be transformed from a threat into an opportunity.

(The author is a Chartered Accountant)