Much of the excitement in gold and silver has been an argument for portfolio diversification outside of the usual portfolio rules (i.e. bonds or cash), due to fear of institutional factors such as the value of the US dollar, central bank independence, and the level of the national debt.

Warsh answered both of those questions. Markets see him as less closely linked to the Trump administration, as well as an individual who wants a tougher stance—making the Fed less of a backstop for government borrowing.

As Jim Reid in Deutsche Bank Noted this morning, gold recorded its biggest one-day decline since 2013. He wrote to clients: “The war is known to be more hawkish on balance than other candidates, pushing back against the existing bearish narrative that supports precious metals. That said, price action has long been isolated from any good discussion about bearishness, but it is always necessary to correct a little ripple, especially the smaller the drop.

At UBS, chief economist Paul Donovan agreed that the correction was not a particularly significant change, although he was not convinced that it was a reaction to larger factors such as the Fed. He wrote: “The sharp drop in gold and silver prices has relatively little economic significance. Although attempts will be made to spin it as a reaction to fundamental economics, it seems more likely that the ‘fear of missing out’ trade has worn off.”

“Increasing prices too much in a short period of time created large effects on wealth, so a price correction more in line with economic fundamentals would be considered positive for the economy (preventing misallocation of resources).”

Indeed, Bank of America’s Candace Browning Platt wrote in a note yesterday that gold’s rally over the past three months has come amid “increasing volatility.” The financial giant’s Bubble Risk Indicator for the asset rose to near 1 earlier this week, “indicating a risk of two tails” the economist added.

A blip is not a downturn

That said, Deutsche Bank remains bullish on gold’s target, saying it will hit $6,000/oz.

Research analyst Michael Hsueh wrote today that precious metal prices will rise for three reasons. First, investor intentions have not changed significantly for the worse in the long term, the rationale for investors to buy gold in the first place (to balance against potential fundamental volatility) has not changed, and thirdly China is more of a prominent driver of precious metals.

In China, for example, Hsueh said gold ETF additions could hit a new high this year — if January purchase rates are annualized — rising sharply in 2025.

“It is dangerous to think that we know what is on the mind of the representative investor of precious metals, or even to think that there is a representative investor. That said, significant institutional investors have announced the possibility of a gradual multi-year diversification from dollar-denominated assets, and we do not know that this has changed,” he said.

“If this trend is reconfirmed in the coming months, we believe it will have significant confidence effects for other investors, as central bank purchases have done in the past.”

Here’s a snapshot of the markets ahead of the opening bell in New York this morning:

• S&P 500 futures fell 0.96%.
• the STOXX Europe 600 flat in early trading.
• the FTSE 100 in the UK rose 0.26% in early trading.
• Nikkei 225 in Japan fell to 1.25%.
• CSI 300 in China dropped to 2.13.
• The South Korean KOSPI increased by 5.26%.
• Nifty 50 in India up 1.06%
• Bitcoin down to $77.67k.