A single announcement from Washington on Friday morning sparked a historic crash in precious metals. The news erased billions in market value as gold and silver prices plummeted. President Donald Trump’s nomination of Kevin Warsh to lead the Federal Reserve triggered the massive selloff.
The move sent the U.S. dollar to its strongest level in months. This caught investors off guard after a year of intense safe-haven buying. Gold suffered its worst one-day decline since 2013 by dropping over nine percent. Silver fared even worse by posting its steepest single-day drop since 1980.
Investors had spent months assuming Trump would nominate a leader who would aggressively slash interest rates. Warsh's nomination completely upended that thesis. He is heavily influenced by economist Milton Friedman and argues that inflation is caused by excessive money printing.
Warsh is also a vocal critic of the Federal Reserve’s massive bond holdings. Markets now expect him to resume quantitative tightening to reduce the money supply. Wall Street viewed him as a credible institutionalist which reduced the instability premium that kept metal prices high.
The "Warsh Shock" signals a fundamental shift in U.S. monetary policy. This change will affect far more than just precious metals. If confirmed, Warsh is expected to lead a Fed that is much more disciplined regarding the money supply.
A stronger dollar is likely to remain the norm as the money supply shrinks. Safe-haven demand is cooling now that dollar credibility is returning to the markets. While interest rates remain volatile, Warsh supports cuts if they are joined by balance sheet reductions.