Macroscope | Why Trump, not Asian investors, is to blame for gold and silver volatility

For some of the most dramatic swings in financial markets in recent memory, look no further than the plunge in the price of silver on January 30. The precious metal suffered its largest one-day fall since March 1980, losing a staggering 27 per cent. Gold, silver’s more illustrious cousin, also experienced its steepest one-day decline since early 1980, dropping 9 per cent.

The boom in precious metals is partly attributable to the dwindling number of safe assets amid mounting concern about the US dollar and Treasury bonds since US President Donald Trump returned to the White House.

Many investors are worried about the debasement of mainstream assets amid hefty fiscal stimulus in advanced economies, the threat posed by inflation and the erosion of governance standards and institutional autonomy in the United States. This makes precious metals, especially gold, an attractive diversifier or hedge.

When Trump announced he would nominate Kevin Warsh to chair the US Federal Reserve, the debasement trade began to unravel as many investors drew comfort from the fact that Warsh, a former Fed governor, was less likely to go easy on inflation. This was enough to trigger a fierce sell-off in precious metals, especially given the blistering rally in recent months.

However, there were other forces at play. The surge in gold and silver was amplified by highly leveraged bets. A significant portion of the borrowed money was in Asia, particularly China, which has become the world’s top buyer of gold in recent years and therefore its price setter.