Editor’s Note
The recent sharp reversal in gold and silver prices highlights how sensitive precious metals remain to shifts in U.S. monetary policy expectations. This report examines the sudden end to the rally, triggered by speculation over a more hawkish future Federal Reserve leadership.
The months-long record chase in the precious metals market has come to an abrupt end. The plunge in gold and silver prices at the end of last week continued on Monday, albeit in a weakened form. One trigger for the sell-off was the news that US President Donald Trump intends to nominate Kevin Warsh, who stands for a tight monetary policy, as the future head of the US Federal Reserve.
In addition, investors who had bet on further price increases were caught off guard. A downward spiral was set in motion – though it was not of long duration: As early as Tuesday, prices began a significant recovery.
This came about as follows: Speculators had “leveraged” (with loans) betting that Trump would nominate someone as Fed chair who would likely subordinate themselves to his desire for rapid interest rate cuts. They were thus betting on a persistently weak dollar and a further rise in precious metal prices.
However, Warsh is considered a monetary policy “hawk” who would likely fight inflation more consistently than Powell, and a determined opponent of a zero-interest-rate policy. Hopes for aggressive interest rate cuts are thus fading, and market participants are more likely to invest in interest-bearing assets such as government bonds instead of interest-free gold.
The sell-off in gold and silver gained momentum. In response, the COMEX commodities exchange, part of the world’s largest futures exchange, CME Group, significantly increased margin requirements for futures contracts. When price losses consume the collateral posted for credit-financed investments, investors must inject additional capital, otherwise the positions are automatically sold. This happened on a massive scale; these “Forced Liquidations” artificially intensified the downward pressure.
Prior to the sell-off, gold and silver had staged a surprisingly rapid rally for a year. Rising uncertainty was likely the main factor; in politically and economically turbulent times, interest in gold and other precious metals like silver traditionally grows.
The recent records coincided temporally with escalating tensions in Venezuela and Iran, Trump’s repeated demands for a US takeover of Greenland, and his increasingly confrontational stance towards allies. Fears of currency devaluation and concerns about the Fed’s independence did the rest.
In general, experts expect geopolitical tensions to continue to support the gold market. Despite the severe market turbulence, commodity experts at Deutsche Bank have not changed their gold price target, keeping it at $6,000 per ounce during the course of this year. In their assessment, among other factors, Chinese investors remain an important driver of gold purchases. Financial services provider JP Morgan also maintains its year-end price target at $6,150 to $6,500.
The gold price had nearly doubled in the twelve months leading up to its record high last week. Over a three-year horizon, the gain was well over 180 percent. Silver had gained around 285 percent within one year. Consequently, a price correction was not surprising, especially as silver had long been considered overbought.
Consequently, the price crash was even more drastic for silver than for gold. On Friday, silver plunged by around 30 percent – the sharpest daily loss since 1980, when brothers Nelson Bunker Hunt and William Herbert Hunt attempted to monopolize the market. It went wrong; the Hunts and, with them, countless private investors suffered significant losses. The price collapsed, and it took 45 years for the nominal record level from back then to be reached again.
The price for a troy ounce of silver temporarily slumped to $71.38 on Monday, after a record high of $121.65 last week. During trading, the quotation was able to recoup some of the losses. The price for a troy ounce of gold fell by more than four percent to around $4,680, after having already fallen by nine percent on Friday.