Gold and silver prices, which had been on a steep rally, plunged by about 10% and 30%, respectively. The slide is seen as the result of expectations for monetary policy easing fading rapidly after former Federal Reserve Governor Kevin Warsh was named the next Fed chair.
In the market, analysts say the investment appeal of non-yielding assets broadly, including gold and silver, could be damaged over the long term, given the hawkish tilt expected under Warsh as the next chair.
According to Investing.com on the 2nd, silver futures prices on the 30th of last month (local time) tumbled 31.4% from the prior session to $78.531 per ounce. It was the biggest one-day drop since March 1980. On the same day, gold futures (April delivery) traded on the New York Mercantile Exchange fell 11.4% to $4,745.1 per ounce from the previous session.
The direct trigger for the plunge was the nomination of former Fed Governor Warsh as chair. The market had largely expected Kevin Hassett, seen as a dove, to be tapped. On that view, funds that had priced in potential rate cuts piled into the gold and silver markets, pushing prices higher.
In particular, if Hassett were nominated, concerns had grown that the Fed could fall under the sway of President Donald Trump, weakening trust in the Fed's monetary policy and the dollar. In the process, prices of commodities, which are risk-free and non-yielding assets, also surged.
But with Warsh ultimately chosen, market sentiment shifted abruptly. Warsh has maintained a critical stance on quantitative easing since his time on the Fed board and is viewed as somewhat hawkish, prioritizing price stability.
Markets see limited chances that the Fed under Warsh will embark on aggressive rate cuts or large-scale asset purchases. As the dollar and real interest rates climbed together, immediate downward pressure hit commodity prices.
When real interest rates rise, interest-free gold and silver are at a relative disadvantage. Gold and silver are representative non-yielding assets, and in rising-rate periods the opportunity cost of holding them increases. Physical investing incurs storage and insurance expenses, while futures investing brings higher interest expense. Analysts say funds are likely to shift from silver to assets that pay interest, such as Government Bonds or deposits.
The fact that gold and silver prices surged in a short span is also cited as a backdrop for the crash. Cho Byeong-hyeon of Daol Investment & Securities said, "Last year, gold outperformed the Nasdaq in relative returns, and silver overwhelmed gold's gains, leaving prices stretched," and added, "The excessive liquidity that had supported the rally and expectations for currency value erosion have weakened, on top of price-level burdens."
With price pressures having piled up, margin requirements for silver futures transactions were raised multiple times, prompting a wave of forced liquidations due to margin calls (demands for additional collateral), some analysts say.
Seo Sang-young, a researcher at Mirae Asset Securities, said, "With the Chicago Mercantile Exchange (CME) repeatedly hiking margin requirements and a shortage of physical silver widening the gap between futures and spot prices, it became difficult to maintain high-leverage positions," and added, "The plunge in gold and silver prices led to a drop in the collateral value of funds that had used them as collateral, triggering automatic margin calls. In particular, selling driven by algorithmic trading appears to have also contributed to the sharp decline."
Chinese supply-demand factors also played a role. Ok Ji-hoe, a researcher at Samsung Futures, said, "On Jan. 30, UBS SDIC Silver Futures Fund, the only silver futures investment fund in mainland China, halted trading for a day due to overheated investor enthusiasm," and noted, "When new money flows into a silver fund it must buy additional silver futures, but the trading halt meant China-originated buying did not come in, which had a large impact."
Losses for domestic investors are also expected to be significant. According to Korea Securities Depository's SAFERO, during the week from the 24th to the 30th of last month, the overseas stock most net bought by Korean retail investors trading U.S. stocks was the iShares Silver Trust exchange-traded fund (ETF), with net purchases totaling about $150 million. That topped Alphabet, IonQ and Tesla over the same period. The ETF has since plunged 28.54% as of the last trading day.
Experts warn that the plunge could go beyond a simple correction and damage silver's investment appeal itself over the long term. Under a new Fed chair, if monetary policy is reset to a tightening stance, the holding expenses of non-yielding assets will inevitably rise structurally.
Shin Seung-jin, head of investment information at Samsung Securities, said, "Rising real interest rates reduce the relative appeal of assets without interest revenue and can drive funds toward profitable assets," adding, "However, since the incoming chair Warsh is seen as supporting some of Trump's policies, current fears about tightening may be overly priced in."