AceCamp Original | Warsh Nomination Triggers Brutal Rout in Gold and Silver: Return to Fed Tradition or Elegant Delay of Fiscal Issues

This article was first published on February 1, 2026, on the AceCamp official website—fresh insights, always a step ahead!

Summary

1. Wash nomination triggers an epic upheaval in the precious metals market

2. Background of Wash and his policy stance

3. Market interpretation and Wall Street reaction

4. My divergence: Contradiction between Wash logic and Trump's fiscal reality

5. Three scenarios for 'QT + interest rate cuts'

1. An epic upheaval in the precious metals market

US President Trump nominated Kevin Warsh to serve as the Federal Reserve chairman, a move that triggered the most severe turmoil in the precious metals market in decades.

– Plummeting gold and silver prices: Gold and silver, which had just hit new intraday record highs on Thursday, subsequently crashed. Following news of the nomination on Friday in the Asian trading session, gold quickly turned negative, dropping below $5,000 per ounce during European stock trading. Losses widened during US stock trading hours, with spot gold falling nearly 13% at one point, marking its largest intraday drop in over forty years since the early 1980s, even surpassing the intensity of the 2008 financial crisis.

– Silver collapse: Silver, which had risen above $120 for the first time on Thursday, fell below $100 during European trading on Friday, and plunged to below $80 at one point during US trading, marking a 30% single-day crash – the largest on record.

– In my view, Warsh’s nomination was merely a trigger. The primary cause was Trump's previous stance that the dollar was like a yo-yo under his control, leading to a surge in safe-haven sentiment. Gold and silver were already under significant pressure at $5,000 and $100 respectively. Coupled with high leverage ratios in market trades and substantial profit-taking demand, these factors collectively caused the crash.

2. Warsh’s background and policy positions

Warsh's professional experience and academic background have made him a highly influential traditionalist within the Federal Reserve.

– Resume and Experience: Served as a Federal Reserve Governor from 2006 to 2011, being one of the youngest governors in history. He played a prominent role during the 2008 financial crisis, leveraging his keen market experience and deep Wall Street connections to become a core bridge between Chairman Bernanke, Wall Street executives, and Republican leaders. After leaving office, he became a research fellow at Stanford University's Hoover Institution and joined Duquesne Family Office to work alongside investment guru Druckenmiller.

– Historical Policy Stance: Warsh has long criticized quantitative easing (QE). While he supported the first round of QE in response to the 2008 crisis, he openly opposed subsequent rounds such as QE2 and QE3. He advocates that the Federal Reserve should return to its core mandate of price stability and is considered a representative of the 'hawkish' stance in Wall Street circles.

– Current Market Understanding of His Policy Proposals:

1. Balance Sheet Adjustment: Advocates for a 'reasonable adjustment' to the Federal Reserve's balance sheet by reducing the balance sheet (quantitative tightening) to withdraw excess liquidity, thereby creating room for future interest rate cuts.

2. Emphasis on Supply-Side Factors: He emphasizes productivity (especially productivity gains driven by AI) as a key variable that will influence inflation and economic growth in the future. This view echoes former Fed Chairman Greenspan’s focus on supply-side factors in the 1990s.

3. Phased Policy Approach: If he takes office, his policy may follow a three-phase strategy:

- Early stage: Maintain a tough stance, prioritizing the control of inflation and rebuilding the credibility of the central bank.

- Mid-term: Use tools such as balance sheet reduction to stabilize price expectations and create conditions for future interest rate cuts.

- Long-term: Rely on structural factors such as productivity improvements to support economic growth, thereby reducing reliance on traditional monetary policies.

– The nomination process has seen some turbulence, but it is basically a done deal: The Department of Justice is investigating the Federal Reserve (involving Powell’s testimony on the 2025 building renovation project), and some Republican lawmakers have pledged to block any Fed nominations until legal issues are resolved.

3. Market Interpretation and Wall Street Reaction

Wall Street generally considers Warsh to be more hawkish compared to other candidates, which could help preserve the independence of the Federal Reserve and solidify the credibility of the US dollar.

– Core rationale: Balance sheet reduction will force the government to face real financing costs, compelling fiscal discipline; at the same time, it removes implicit market guarantees (breaking the Fed put), supporting productive investments such as AI through interest rate cuts, and allowing the Fed to retreat within traditional boundaries.

– Institutional Views:

– Positive evaluation: Yardeni Research and Northern Trust consider Warsh to be the 'most traditional and consensus-aligned' choice, welcomed by the bond market. Natixis pointed out that he is a supply-side optimist who believes deregulation and tax cuts can stimulate productivity, which could become a reason for rapid interest rate cuts.

– Risks: ProShares noted that if Warsh simultaneously supports lowering short-term rates while opposing the suppression of long-term yields, it may lead to further steepening of the yield curve.

– Points of Disagreement: Some observers believe that Warsh's recent external communications have taken on a 'dovish' tone, creating a contrast that makes his future stance uncertain.

4. The author’s point of contention: The contradiction between Warsh's logic and Trump’s fiscal reality

The author believes there is a significant contradiction between Warsh's current advocacy of 'QT + interest rate cuts' and Trump's complete abandonment of fiscal discipline.

(1) The political contract behind the nomination The premise of Warsh receiving the nomination lies in his interest rate stance aligning with Trump. Last July, he told Fox News that 'the Fed could cut rates more aggressively by reducing its $6.6 trillion balance sheet more actively.' This aligns with Trump’s selection criterion of 'those who disagree with me cannot be chairman.' Additionally, Warsh's wife Jane Lauder’s family (Estee Lauder) is a core Republican donor, and her father donated $5 million to Trump this past March.

(2) Warsh may assume a 'Bessent-like' role Referencing Treasury Secretary Bessent’s performance: Initially using his Wall Street background to reassure markets, framing extreme tariffs as 'leverage' and 'supply-side reforms,' while actually adopting a strategy of 'verbal reassurance, action compliance.' Warsh might similarly leverage his professional background, packaging potentially destructive policies into palatable academic logic, thereby delaying severe market reactions.

(3) Complete loss of fiscal discipline The Trump administration is expanding deficits through various means:

– OBBA contributed to the increase in deficits: The extension of TCJA and corporate tax cuts are expected to increase deficits by $3.4 trillion over 10 years.

– Expansion of expenditures: Tariff revenues are far from sufficient to cover the promised 'universal dividend' plan (costing about $600 billion).

– Debt Pressure: By early 2026, the national debt will reach $38.5 trillion, with interest payments accounting for 18% of federal revenue (approximately $1.12 trillion).

– Lack of buyers: Positions on Europe and Greenland may lead to sovereign wealth funds withdrawing from US Treasuries, compounded by QT, long-term US Treasuries may face pressure.

5. The implications of 'QT + rate cuts': Trump's art of 'delaying'

The current scale of US debt and fiscal deficits are consequences of the financial crisis of 2008, the pandemic in 2020, and two consecutive administrations' uncontrolled spending (Biden essentially continued the pattern set during Trump’s first term), representing a longstanding issue that is hard to reverse. The best response has always been to delay rather than solve, especially when the government shows no intention of controlling expenditures. In my view, Wash's combination measures might ultimately resemble Bessent's superficial market appeasement while actually serving political intentions. Trump's goal is to continuously create an atmosphere of success; as long as the US debt problem does not explode during his term, he is content. The key to achieving this goal lies in whether he can secure victory in the midterm elections. Regarding Wash's combination approach, I believe there could be three possible scenarios.

– Scenario One: Gradual Transition (2019 Model) If AI's displacement of the labor market is relatively mild (without causing a rapid rise in unemployment), inflation remains stable, and the 10-year US Treasury yield stays below 4.5%, then Wash can slowly reduce the balance sheet, intervening only during short-term liquidity crises (such as tax season). This would be similar to the Federal Reserve's emergency capital injection after the SOFR spike in 2019, representing a minor fix within the system.

– Scenario Two: System Rebound Triggered by Return to Tradition If Wash significantly reduces the Fed’s holdings of US Treasuries (currently at 11%, a 50% reduction would amount to roughly $2 trillion), with debt rollovers still peaking in 2026, long-term bond yields may soar due to insufficient buyers, potentially leading to simultaneous crashes in stocks, bonds, and currency. At that point, the Federal Reserve will likely be forced back into being a major buyer, with the government shifting to issuing medium- and short-term bonds to control interest rate expenditures, but will continue to face significant pressure from large-scale debt rollovers.

– Scenario Three: Extreme Recession and Political Intervention If the balance sheet reduction is too fast, the rollover of US Treasuries will squeeze private credit, inefficient companies will go bankrupt due to lack of low-cost liquidity, compounded by AI’s impact on the labor market, leading to a sharp increase in unemployment, which could trigger an economic recession.

– The author's view: As long as Trump wins the midterm elections, the probability of this scenario occurring is low. Once any signs emerge, he will definitely intervene and push for interest rates to be lowered close to zero.

– Risk Points: If the midterms are lost, partisan infighting will lead to an inability to respond to the crisis, and the collapse may occur during Trump’s term.

– Endgame: This political compliance will echo the tragedy of the Nixon era in 1970, leading to unanchored inflation expectations and prolonged stagflation, causing the market to completely lose trust in the Federal Reserve's independence. However, for Trump, this has already become a problem for the 'next president' to deal with.

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