After days of panic buying and record-high prices, gold and silver prices dropped sharply when Donald Trump said he would be in charge of the US Federal Reserve. The move calmed fears that the central bank could be used for political purposes and led to a rush to cash in on profits from precious metals.
Prices for gold and silver go up to record highs and then fall sharply.
By early Friday afternoon, the price changes were very clear. Gold was still down 6.27%, with an ounce costing about $5,037.91. It had gone down by more than 8% for a short time during the day. Silver did even worse, dropping more than 17.6% at one point and ending up down 14.30% to $99.1537 an ounce.
The drop in gold and silver prices was a big change from the record highs they had just reached 24 hours earlier.
Both metals set new records on Thursday. The price of gold went up to $5,595.47 an ounce, and the price of silver went up to $121.6540. The peaks came after a quick rise caused by a mix of geopolitical tensions, uncertainty about US politics, and nagging doubts about the Fed’s independence.
From the start of the year to Thursday’s highs, gold rose by almost 30%. Silver prices rose by almost 70% because it was a safe haven and there was a lot of demand for it in electronics and solar panels. The same excitement spread to industrial metals like copper, which did well as people rushed to buy things they thought were safer than currencies.
People are less worried about the central bank now that Trump has chosen Kevin Warsh.
The change on Friday was political, not geological. Donald Trump wants Kevin Warsh, a former governor of the Federal Reserve, to be the new chair of the Fed when Jerome Powell’s term ends in May.
People think of Warsh as someone who is very much in touch with traditional central banking. He was a member of the Fed’s Board of Governors during the global financial crisis. Since then, people in the financial world have come to know him as a conservative policymaker who cares about institutions.
Traders thought Warsh’s nomination meant that the Fed wouldn’t just do what the White House told them to do.
Trump has been going after Powell and the Fed a lot lately, saying that interest rates need to be lowered even more. Those fights scared investors and made them think that precious metals could protect them from a future in which the US central bank might not be independent or trustworthy.
Experts said that the new name changed the whole thing. A candidate who is seen as “normal” and not just an extension of the president calms fears that the Fed will become too political. That means that gold and silver are less useful as a way to keep yourself safe from institutional failure.
Taking profits makes the drop happen faster.
The selling pressure wasn’t just because of the politics of central banks. A lot of traders made a lot of money on paper after the metals went up a lot. The news on Friday gave traders a good reason to take their profits.
Algorithmic trading and stop-loss orders probably made the drop even bigger once prices started to fall. When sentiment changes, big speculative positions that have built up during the recent rise can quickly unwind. This can make prices drop faster than they would if only fundamentals were taken into account.
The size of the correction shows that investors were looking for any reason to sell.
Several market experts said that the drop didn’t seem like panic, but rather like a sharp but reasonable reset. On charts, even a small drop after a big rise in a short amount of time can look big.
Why “safe havens” suddenly didn’t seem as important
People often look for gold and silver when they are scared, like during wars, financial crises, or when they think their money is in danger. This year’s rally had all three themes:
A hairstylist says that the “Black Cherry” shade is the best choice for women over 50 this winter.
Farewell to Hair Coloring: Organic Silver Hair Blending Methods Rapidly Drawing Major Interest
Things are getting worse in the Middle East and between Washington and Tehran.
Concerns about how unstable US politics can be during an election cycle
People weren’t sure if the Fed would stick to its data-driven monetary policy or give in to politics.
One of those fears—about the Fed’s independence—changed the math when Trump chose Warsh. It looked less likely that a central bank would cut rates or make money by making political promises. That made it less appealing to put money in gold to keep it safe.
The effect of the Fed’s independence on metal prices
The connection between the name of a central banker and the price of a gold bar may seem strange to many retail investors. But the chain is pretty clear.
How people feel about the Fed and how investors act How this affects silver and gold
Not connected to anything and reliableMore trust in the dollar and bondsFewer people need safe-haven metals
Politicised and hard to guess. Get into hard assets and currencies from other countries.More people want silver and gold.
People are more likely to hold dollars and US government debt if they believe the Fed will resist political pressure. There is yield and safety, but not in a metal that doesn’t pay interest. If that expectation goes away, bullion suddenly looks like a better way to keep your money safe.
Friday’s move shows that the markets are leaning toward the first scenario, at least for now. A lot of people think of Warsh as a “defender of the Fed’s independence,” which goes against months of rumours that the central bank is controlled by politics.
What this means for everyday investors
The big swings in price show how risky it can be to trade precious metals, especially for people who are new to it. If you bought gold or silver on Thursday because of scary headlines or social media buzz, you would have lost a lot of money by the next day.
Gold can still help long-term savers avoid inflation or currency risk, but only to a point. A lot of financial planners say that you shouldn’t put all your money into precious metals. Instead, you should keep them as a small part of your portfolio.
Words that are important to explain
There are a lot of phrases that sound technical this week that really change how people spend their money:
A safe-haven asset is an investment that tends to hold its value when the markets are in trouble. The US dollar, gold, and the Swiss franc are some examples.
Taking profits means selling an asset after its value has gone up a lot to make sure you keep the money. This can start or make things worse.
Independence of the Fed: The belief that central bankers don’t change interest rates to meet short-term political goals, but instead look at economic data.
Correction: A quick drop in prices that makes up for some of a previous rise. It hurts, but it doesn’t have to mean the end of the world.
What might happen to gold and silver from now on
There are a lot of different ways to move forward. If tensions between countries rise or US growth data weakens, people may quickly start buying gold and silver again, which would cause prices to go back up. If Warsh stays in a cautious, predictable position and inflation keeps going down, on the other hand, metals might stay at lower levels.
One possible scenario is choppy, sideways trading, where prices go up and down in wide ranges as investors think about each new piece of data and political news. In that case, short-term traders may like volatility, but long-term holders care more about whether metals keep beating inflation over the years instead of days.
People who are thinking about investing in metals now need to think about the risks. It might seem like a good idea to buy after a big drop, but if there is another policy shock from Washington, Tehran, or somewhere else, prices could change again. You can lessen the effects of these sudden changes by mixing precious metals with other assets like bonds, stocks, and cash. This will still give you some protection against financial or political stress.
