Iron ore investors were given something of a reality check overnight as the commodity plunged to reverse some of its recent gains.

Indeed, iron ore prices had been tearing higher recently. After hitting a low around US$38 a tonne in mid-December 2015, the commodity surged above US$60 a tonne earlier this week. In fact, it experienced its strongest one-day rise in history on Monday night, hitting US$63.75 a tonne and sparking hope in the market that the iron ore rout was finally over.

Part of this was driven by actions and comments from China’s regulators, which are aiming for 6.5% annual growth for their economy over the next five years. Investors were hopeful that this demand could help balance out the market’s oversupply situation, helping the iron ore price to recover.

Of course, there were always doubts regarding the sustainability of the rally, as we noted here. According to The Australian Financial Review, a number of banks, including Goldman Sachs and Citigroup, also cast their doubts suggesting that the gains wouldn’t last and that iron ore would instead continue the downwards spiral it has endured over recent years.

Unfortunately for investors, it looks as though those analysts will be right. Iron ore fell 0.2% on Tuesday night and another 8.8% overnight to trade at US$58.02 a dry metric tonne, according to data from The Metal Bulletin.

Shares across the sector, including the likes of Rio Tinto Limited (ASX: RIO) and BC Iron Limited (ASX: BCI) have actually risen today despite the heavy overnight fall, although the pair have fallen in recent days. On the other hand, BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) have both fallen today, although only by 0.5% each.

While many investors eagerly bought into the recent rally, an element of caution is definitely wise. Indeed, The AFR even quoted Morgan Ball, managing director of junior producer BC Iron, as saying (my emphasis): “We have seen this surprising blip on Monday into the $US60s, we don’t think it will stay there and it will come back.” Rio Tinto and BHP Billiton are also reportedly somewhat bearish on the outlook for the commodity in the near term.

Foolish takeaway

Share prices across the sector have risen strongly in recent times, and those gains may be sustained if the iron ore price can stay around these levels. However, if it does continue to fall, as it did overnight, there could be more pain in store for those investors with exposure.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.