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Gold’s second-biggest single-day drop in about four years could set up the most decisive test yet for investor appetite in precious metals.

Prices of the metal on the Multi Commodity Exchange plunged nearly 9% intraday to around ₹1.33 lakh per 10g, erasing almost all of its gains so far this year. Silver fared worse, hitting lower circuits with about 11% losses.

Monday’s drop in gold is the second steepest in a day since 2022, trailing only the 10% plunge on 2 February this year, Mint’s analysis showed—underscoring a sharp rise in volatility across precious metals in 2026.

The latest sell-off was triggered by fears of macroeconomic tightening, according to experts. As the West Asia conflict stretches into its fourth week and Brent hovers around $108 a barrel, fears of global inflation have firmed up, shifting interest-rate expectations.

According to CME’s FedWatch tool, the majority of market participants (53%) now expect the US Federal Reserve to raise interest rates by October to control expected inflation. Around 14% see a 25-basis-point hike as early as April, pushing the target range towards 3.75-4% from the current 3.5-3.75%.

Fears of a shift to a tighter monetary regime are pushing gold to give up gains that were built on looser policy expectations, said Manav Modi, commodities analyst at Motilal Oswal Financial Services.

Higher interest rate expectations have strengthened the US dollar and pushed US bond yields higher, both traditional headwinds for gold. At the same time, leveraged positions across futures markets have begun to unwind, amplifying the fall. Moreover, a key cushion for gold prices, central bank buying, has been absent this quarter amid a stronger dollar, exacerbating the fall, said Manish Bhandari, chief executive officer and portfolio manager at Vallum Capital.

“There are high chances that prices can decline further in the near term as rate hike probabilities increase,” Modi of Motilal Oswal said, pointing to $4,000 and $3,800 as key global support levels.

However, he added that the latest fall might not trigger a retail rush to “buy the dip” as fresh buying may only emerge once prices stabilize.

This raises a more immediate question: does the latest shock risk triggering net outflows from gold exchange-traded funds (ETFs) for the first time in a year?

Flows were already weakening. Net inflows into gold ETFs fell 78% in February to ₹5,256 crore from ₹24,040 crore in January. The last time the category saw outflows was in March and April 2025. With volatility surging and prices correcting, experts say the market may now be transitioning from slowing inflows to potential redemptions.

March could see net outflows from gold ETFs amid panic selling, according to Shashank Udupa, Securities and Exchange Board of India-registered research analyst and smallcase manager. Many investors, he said, may look to book losses for tax-loss harvesting or exit speculative positions they entered in January.

However, he said that long-term buyers may still view the correction as an opportunity, but only once volatility subsides. “People were waiting for this dip… but they will only buy when the falling knife stops,” Udupa said.

Kaustubh Belapurkar, director of fund research at Morningstar India, expects a pause in inflows rather than immediate outflows. “Many investors have not seen a negative cycle in gold. Their sentiment has been dented, but it typically takes sustained underperformance before money starts moving out.”

Indian households, however, already hold nearly $5 trillion worth of gold, which accounts for about 65% of their non-property wealth, according to Kotak Institutional Equities. That limits incremental demand at elevated prices and raises the risk of reallocation when returns turn negative. Motilal Oswal’s Modi said India remains a “long-only” gold market, but fresh inflows are likely to depend on stability rather than momentum.

The bigger shift, however, may be in how gold is perceived. After delivering outsized returns over the past two years, gold had increasingly been treated as a return-generating asset. That narrative could be reversing.

“Gold is coming back to its original avatar… which is a hedge,” Udupa said, adding that the recent fall is simply “removing excess froth” built during the rally.

Motilal Oswal’s Modi said daily swings in gold prices have widened sharply from earlier cycles, making the asset better suited for long-term, hedge-oriented investors.

For now, March is emerging as a transition phase for gold investors. Whether it marks the first net outflow in a year or just a sharp slowdown in inflows will ultimately hinge on whether the yellow metal finds its floor.

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