Why gold and silver suddenly collapsed
Gold, silver and copper have just suffered one of the sharpest short-term reversals in recent memory – and it may be more about regime change at the Federal Reserve than simple profit-taking.
Let’s explain what’s been going on in the last 24 hours. The gold price dropped 11.4% in a night. It’s still going down today. Usually you expect some sort of rebound the next day, but it’s still falling. Copper was down 4.5%, and down another 4.5% today. Silver was down 31.4%.
There was a warning the night before when prices moved in very wide bands but rebounded. Volatility within a trend suggests indecision and often marks a turning point. Here we are a day later with an absolute dump in some of the most popular momentum trades of the last year, particularly over the last month or two.
Momentum trades unwind
What killed the gold and silver trades? The move has been linked to the appointment of Kevin Warsh as the new Federal Reserve chair. He will not replace Jerome Powell until May 15, but the appointment alone appears to have shifted sentiment.
To be blunt, those rallies were getting ridiculous anyway. Anyone who has been around markets long enough knew something would end them, and the end would be bloody. It has been.
But why would Kevin Warsh make that sort of difference?
He is highly critical of the current Federal Reserve framework. He argues they are working off an inflation model built in 1978, with governance mechanisms created even earlier. In his view, the system is out of date and needs regime change.
A regime change at the Fed
Warsh suggests the Fed is not properly accounting for the productivity gains expected from AI. His argument is that you can have lower interest rates – which President Trump wants – without triggering inflation because AI-driven productivity will cut costs and suppress inflationary pressures.
He is also critical of long-term government behaviour, arguing that printing too much money, spending too much and living too well devalues the US dollar. For decades, the US has expanded deficits and printed money, inflating asset prices on Wall Street while mainstream America struggles with inflation and declining purchasing power.
The proposed shift is that the Fed would work more closely with the Treasury rather than operate independently. Instead of printing money to support asset prices, the Treasury would issue more bonds and spend directly into the economy, for example on defence.
The impact on gold and hard assets
If markets believe there will be less money printing and inflation will be managed through productivity gains rather than monetary expansion, the rationale for holding gold as an inflation hedge weakens.
Gold is traditionally seen as a store of value when currencies are being debased. If investors believe there will be no prolonged money printing under a new regime, demand for gold as protection falls. The same logic applies to silver and other hard assets that had rallied on the idea that the US was heading into a debt spiral.
In the short term, this has been the trigger for momentum traders to exit positions aggressively. Rather than pushing asset prices up through monetary expansion, the theory is that fiscal spending will stimulate the real economy instead of primarily benefiting Wall Street.
It is a revolutionary idea and worth reading more about. Whether it works remains to be seen. But for now, the mere prospect of a structural shift at the Federal Reserve has been enough to bring an abrupt end to some of the market’s most crowded momentum trades.