Gold prices fell again on Wednesday, a day after posting their biggest one-day drop in over a decade — yet history shows that the plunge is more likely to be followed by a modest move higher.

Gold for December delivery, the most active contract, had rallied 56% for the year through Tuesday’s session. It peaked at $4,398 per ounce in Monday intraday trading as investors searched for safe havens from economic uncertainty, inflation risks and simmering U.S.-China trade tensions.

Then on Tuesday, the precious metal plunged by 5.7% to end at $4,109.10 per ounce as “gold tourists” — or investors who bought the precious metal on a “fear of missing out” trade — got squeezed out and money managers rushed to sell in order to protect their gains, according to Marc Chandler, chief market strategist and managing director at Bannockburn Capital Markets.

That one-day decline was the biggest in 12 years. Gold futures then fell another 1.1% to settle at $4,065.40 Wednesday.

The retreat has raised the question of whether gold has topped out or is just experiencing a long-overdue correction, said Fawad Razaqzada, market analyst at StoneX, in a note Tuesday. “I guess time will tell,” he said.

But a look at previous big daily declines for the precious metal — those of 5% of more — shows that drops like this one may not have a lasting effect.

An analysis of most active gold futures conducted by Dow Jones Market Data shows that after daily declines of 5% or more since May 24, 2006, prices on average traded about 1.82% higher a month later. The biggest percentage rise was 15.46% a month after a 7.3% fall on June 13, 2006, while the biggest loss was 7.76% a month after a 5.4% fall on May 24, 2006.

“Gold and silver should not be expected to go up in a straight line,” Stefan Gleason, president and chief executive officer at Money Metals Exchange, told MarketWatch. Corrections like the one seen this week are “healthy and helpful,” he said. “Bull markets climb a wall of worry.”

Questioning the debasement trade

Gold prices dropped as skepticism swirled around the precious metal’s role as a hedge against the U.S. dollar in one of 2025’s most popular trading strategies, known as the debasement trade. It’s premised on the view that the dollar’s value is poised to deteriorate, prompting investors to rely on gold as an alternative asset.

Money Metals’ Gleason told MarketWatch that the “debasement-trade thesis is still very much intact,” and that it’s “silly to suggest the debasement trade is dead simply because there was big pullback amid a monstrous and relentless rally.”

But Chandler at Bannockburn Capital Markets said the thinking behind the debasement trade is failing to hold up. By almost every metric, the dollar remains overvalued relative to other currencies, he noted.

Investors in general appeared to be questioning the logic behind the debasement trade “just a little bit,” Chandler said via phone. “We’ve seen gold come off sharply in the last few days, while the dollar is firmer. My sense is what the debasement trade misses is that the dollar is overvalued by any measure. A stronger case could be made for the debasement trade if the dollar was cheap, but it’s not.”

Chandler pointed to data from the Organization for Economic Cooperation and Development. The data, which aim to equalize the purchasing power of different currencies by eliminating differences in price levels between countries, shows that the euro and Japanese yen are more than 50% undervalued relative to the dollar, while the Swiss franc is the only G-10 currency that is overvalued versus the dollar, by a little over 18%.

Meanwhile, the ICE U.S. Dollar Index, a measure of the greenback versus a basket of six other currencies, was holding steady at close to 99 on Wednesday, after inching higher since last Friday. The dollar is still very overvalued, and if it goes to fair value, “that’s not really a debasement,” Chandler said.

Market participants are underestimating the chance of a rebound in the dollar, said Steven Englander, global head of G-10 FX research and North American macro strategy at Standard Chartered Bank in New York. Englander said in a Wednesday email that he sees “less room” for the Federal Reserve to cut interest rates than others do, and that this view ends up supporting the U.S. currency.

In addition, Englander said that the U.S. “may be enjoying a productivity surge,” which normally leads to a stronger dollar, and that reserve managers seem “very cautious” about selling the greenback.