How much of the recent mania for gold and silver was fuelled by US dollar “debasement” fears? Quite a lot, judging by the crash in precious metals on Friday following US President Donald Trump’s announcement of former inflation hawk Kevin Warsh as his pick for the new Federal Reserve chair. The collapse was truly historic.
Platinum and silver posted their biggest one-day losses on record, falling as much as 20% and 30%, respectively, and gold plunged 10% for its steepest fall since 1983. This partly reflects the level of speculation behind the rapid ascent of precious metal prices in recent months. Silver rose 70% in the first four weeks of the year alone.
Yet this momentum-driven spike was seemingly rooted in something real: fears that the US is on a ruinous path of fiscal folly, expanding money supply and a degraded currency. Precious metals were a hedge against this, which quickly transformed into a bubble waiting to be popped. All that was needed was a catalyst.
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Enter Kevin Warsh. Views on how Warsh, a former Fed governor from 2006-11, will lead the central bank if confirmed have been notably divided, largely because his policy stance has seemingly shifted meaningfully over the years. As a Fed governor, he was known as a policy “hawk”, worried about the inflationary impact of the Fed’s monetary experiments following the global financial crisis, even as unemployment was high and inflation was a non-issue.
In fact, Warsh resigned from the Fed board of governors in 2011 in protest against the central bank’s “quantitative easing” programme, the buying of huge amounts of bonds to hold down long-term rates. Warsh now agrees with Trump, treasury secretary Scott Bessent and Fed governors Stephen Miran and Christopher Waller that interest rates should be lower, even though inflation remains above the central bank’s 2% target. Still, one thing hasn’t changed.
Warsh is against the Fed carrying a bloated balance sheet and wants the central bank to reduce its financial market footprint. As recently as October, Warsh told Fox Business that the Fed should “free up the balance sheet, take money out of Wall Street”. Broadly speaking, if we have a Fed that is now even more opposed to “money printing”, the “debasement” trade is diminished, and “hard” assets like precious metals lose their lustre.
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