Epic plunge in gold and silver! What happened?

Author: Li Dan

Source: Wall Street News

Gold and silver, which had both hit new all-time highs during trading on Thursday, plummeted. Gold reversed its gains early Friday in the Asian session following reports that Trump would nominate Warsh as Federal Reserve Chair. It fell below the $5,000 per ounce level during European trading, with losses deepening by midday U.S. trading hours. Spot gold’s intraday decline approached 13%, marking its largest drop in over four decades since the early 1980s, surpassing even the declines seen during the 2008 financial crisis.

Silver, which had broken above $120 for the first time in history on Thursday, plunged below $100 during European trading on Friday and fell below $80 in U.S. trading. Spot silver collapsed more than 35% at one point, recording its biggest ever single-day drop. This “bloodbath” spread across the entire metals market, with London copper — which also hit record highs on Thursday — falling nearly 6% at one stage.

The market attributed this crash to a sharp shift in investor expectations regarding Fed policy.

Warsh has long been known for his hawkish stance. Despite recently supporting interest rate cuts to align with Trump's views, the market still believes he is unlikely to pursue aggressive rate reductions.

Thu Lan Nguyen, an analyst at Commerzbank, said: 'The market sees Warsh as more hawkish compared to other candidates like Hassett.' This expectation fueled a rebound in the dollar, reducing the appeal of dollar-denominated commodities for global buyers.

Warsh's nomination also eased concerns about the loss of the Federal Reserve's independence.

Previously, investors flocked to precious metals as a safe haven partly due to fears of currency devaluation and concerns over the Fed's independence.

ING foreign exchange strategist Francesco Pesole said that Warsh's selection 'is good news for the dollar and helps alleviate some concerns about more dovish candidates.'

This plunge also exposed extreme fragility in the precious metals market.

Following the recent consecutive surges in gold and silver prices, crowded long positions, record purchases of bullish options, and extreme leverage levels left the market in a state where a 'gamma squeeze' could be triggered at any moment.

Michael Brown, senior research strategist at Pepperstone, said: 'The market has already become extremely frothy, it only takes a small trigger to spark such a move.'

During the midday session of US stocks on Friday, the precious metals market experienced a heart-stopping plunge. The main silver futures contract in New York, which had hit a record high of $121.785 on Thursday, fell below $80, hitting as low as $74, with intraday losses slightly exceeding 35%. Spot silver fell below $74.60, posting a 35.5% drop during the day, marking the largest intraday decline on record.

Gold also suffered significant losses. New York gold futures, which had risen to a record high of $5,586.2 on Thursday, fell to $4,714.5 during the midday session of US stocks on Friday, dropping nearly 12% during the day. Spot gold approached $4,670 during the midday session of US stocks, falling more than 12.7% during the day.

By the close of gold futures during the midday session of US stocks, COMEX February gold futures settled down 11.37% at $4,713.9 per ounce, recording the largest one-day decline since January 22, 1980. COMEX February silver futures closed down 31.35% at $78.29 per ounce, marking the largest closing decline since March 27, 1980.

Industrial metals were not spared either. London copper, which had surged past $14,520 to reach a new all-time high with an 11% gain on Thursday, fell below $12,850 during Friday's session, dropping nearly 5.7% during the day and closing down about 3.4% at $13,158 per ton. By the close, London tin fell about 5.7%, while London aluminum and nickel dropped more than 2%.

The trigger for the market sell-off was the news of Warsh’s nomination.

Early Friday morning in the Asian session, reports emerged that Trump would nominate Warsh as Fed Chair, prompting gold, which had set new intraday record highs for nine consecutive trading days, to immediately reverse course and turn lower.

Ahead of the US stock market open on Friday, Trump announced the nomination via his social media platform, stating he has known Warsh for a long time and has no doubt that he will rank among the greatest Fed Chairs, possibly even the best one.

Wash was previously known for his long-standing hawkish stance but changed his tone last year in response to Trump's call for significant interest rate cuts, which was seen as key to his nomination.

Wall Street investors and strategists said that Trump's choice of Wash to lead the Federal Reserve was a relatively hawkish decision. He might resist balance sheet expansion, which would support the US dollar and steepen the US Treasury yield curve.

Tom Price, an analyst at Panmure Liberum, stated:

The market views Kevin Warsh as rational, and he will not actively push for rate cuts. Ordinary investors with diverse objectives — such as capital preservation — are taking profits.

Wash’s nomination triggered a major rebound in the US dollar, marking its best single-day performance in six months since July of last year. The ICE US Dollar Index, which tracks the dollar against a basket of currencies, broke above 97.10 during the midday session on Friday, rising nearly 0.9% on the day. A stronger dollar reduces the appeal of dollar-denominated commodities for many global buyers and undermines the theory that precious metals could replace the dollar as a global reserve currency.

Although Wash's nomination acted as the trigger for the sell-off, analysts generally believe that technical factors amplified the declines.

Media reports suggest that surging prices and volatility have put pressure on traders' risk models and balance sheets. A Goldman Sachs report pointed out that a record wave of bullish options buying has 'mechanically reinforced upward price momentum,' as options sellers hedge their exposure by purchasing more futures.

The decline in gold may have been accelerated by what is known as a 'gamma squeeze.' This occurs when options traders need to buy more futures to maintain portfolio balance as prices rise, and sell when prices fall.

For the SPDR Gold ETF, a large number of positions set to expire on Friday were concentrated at $465 and $455, while on Comex, substantial option positions for March and April were centered around $5,300, $5,200, and $5,100.

Matt Maley, equity strategist at Miller Tabak, said: "This is insane. A large part of this might be 'forced selling.' Silver has been the hottest asset for day traders and other short-term speculators recently, so silver had accumulated some leverage. As it plunged today, margin calls were triggered."

Michael Brown of Pepperstone pointed out that 'for some time, conditions in the metals market have been extremely frothy, and signs earlier this week showed things were becoming completely disorderly.' He noted that positioning in gold and silver markets was 'obviously extremely crowded on the long side, with volatility rising to frankly absurd levels.' In a market with such high trading volumes and 'leveraged longs' under so much stress, 'it doesn’t take much to trigger' a move like Friday's.

Brown stated: 'Simply put, everyone is rushing for the exit at the same time, forcing prices down, which in turn triggers further forced selling,' reminding us that 'momentum works both ways.'

Christopher Wong, a strategist at Overseas-Chinese Banking Corp., said the move in gold 'validates the warning that what rises fast falls fast.' While the news about Wash’s nomination was the trigger, he said a pullback was overdue, 'like one of those excuses the market was waiting for to unwind those parabolic moves.'

Before the plunge, multiple technical indicators had already issued warning signals. The Relative Strength Index (RSI) showed in recent weeks that gold and silver may have been overbought and due for a correction. Gold’s RSI recently hit 90, the highest level for the precious metal in decades.

Dominik Sperzel, head of trading at Heraeus Precious Metals, said volatility was extremely extreme, with the psychological resistance levels of $5,000 and $100 breached multiple times on Friday, 'but we need to prepare for the roller coaster to continue.'

Despite Friday’s sharp drop, gold and silver still posted solid gains in January. Based on front-month contract closing prices, New York gold futures rose about 9% in January, while silver futures surged over 10%.

COMEX February gold futures gained 8.98% in January, marking the largest monthly gain in four months and extending their winning streak to six months, the longest since October 2024. COMEX February silver futures soared 11.63% in January, marking nine consecutive months of gains and the longest monthly winning streak, with an accumulated increase of 140.66% over nine months, the largest nine-month gain since April 2011.

Analysts at Commerzbank wrote in a Friday report that the extent of the pullback 'suggests that market participants were simply waiting for an opportunity to take profits after the rapid price surge.' Thu Lan Nguyen, head of commodity research at the bank, noted,

Although 'the market considers Warsh more hawkish compared to other candidates like Hassett,' 'we still believe that the Federal Reserve is likely to give in to some extent, and the scale of rate cuts will exceed the current market expectations.'

The sharp drop in precious metals dragged down share prices of major mining companies. During Friday's session, US-listed gold mining giants Newmont (NEM), Barrick Mining (B), and Agnico Eagle Mines (AEM) all fell more than 10%, while Coeur Mining (CDE) dropped nearly 19% at one point.

Silver ETFs suffered even heavier blows. During trading, ProShares Ultra Silver (AGQ) plummeted over 60%, and iShares Silver Trust ETF (SLV) fell more than 30%, both funds recording their worst single-day performance ever. Gold ETFs also came under pressure.

Despite the heavy losses for mining stocks on Friday, some analysts believe the pullback is beneficial for the market’s health. Nate Miller, Vice President of Product Development at Amplify ETFs, stated that silver benefits from safe-haven and store-of-value demand, industrial demand, and global supply shortages. Some consolidation after such a rapid surge 'is healthy and aligns with typical behavior in commodity markets following quick price appreciation.'

Peter Grant, Vice President and Senior Metals Strategist at Zaner Metals, noted that although the rally had indeed moved too far, too fast, it is not too late to buy metals now. He described a drop below $100 as an 'opportunity,' particularly around the 20-day moving average near $93. However, he added, 'you must be able to withstand volatility, which may remain elevated.'

Bloomberg macro strategist Simon White pointed out:

The rise in the silver/gold (price) ratio has been almost as large as it was in the late 1970s, and today's dramatic movements may indicate that this could mark a rejection point. However, when viewed individually, neither gold nor silver has so far fully matched the rally seen in 1979. It is still too early to conclude whether silver relative to gold marks the end of a historic rally in precious metals. Price is now becoming the main driver, with fundamentals temporarily taking a back seat.

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