It’s been a wild ride for precious metals this week, and the asset moves are flashing major warning signs for the markets. As every Gold ( XAUUSD) and silver trader knows, these moves are not normal. The big question for everyone now is what they mean, what we can expect to happen next.
Gold ( XAUUSD) started the week by breaking above $5,000 per ounce for the first time ever, and then proceeded to roar all the way up to $5,600. Silver rose even faster, topping out 18% gains by Thursday. Gains of that magnitude are unprecedented in modern market history. Then overnight, those gains were almost entirely erased. Gold is still slated to have the best monthly gain in fourty years. But the wild price swings are very concerning for an asset whose main selling point is precisely that it offers stability as a store of value.
Knee-jerk Reactions?
Part of the issue is that the main drivers of the market’s moves this week have been geopolitical, which are notoriously unpredictable. The biggest shock came on Tuesday, when US President Donald Trump signaled that he supported a weaker dollar. Traders and analysts had long suspected that was the case, but they were surprised he said it so openly. This precipitated a flight from dollars into stores of value like gold and silver, which some analysts at the time called a “knee-jerk” reaction.
Even as US Treasury Secretary Scott Besent tried to calm the waters, saying the President’s remarks weren’t a change in policy, Gold ( XAUUSD)kept rising. The Fed’s more hawkish stance on Wednesday couldn’t stop the rise. Eventually, though, it just ran out of momentum, and profit-taking took over. The subsequent crash in gold prices went beyond mere profit-taking and was widely attributed to rumors that Trump would appoint former Fed governor Kevin Warsh to replace Fed Chair Jerome Powell in May. This raises the question of why it had such a big impact on the market and could be evidence of another knee-jerk reaction.
Does Trump Want a Weaker Dollar?
Many of Trump’s preferred policies, such as unpredictable tariffs, lower rates, and increased government spending, have the logical outcome of a weaker dollar. And the dollar has weakened in double digits since he took office. So, it’s logical to assume that’s what Trump has been aiming at. His comments that the weaker dollar was “great” seemed to affirm that narrative.
The thing about Warsh is that he’s seen as the most hawkish of the potential candidates to succeed Powell. The appointment is causing some dissonance among economists, analysts, and traders who are sure Trump wants a weaker dollar. However, Trump’s comments can also be interpreted as “the dollar is doing great” in the context of his usual cheerleading for America. After all, Trump has railed about high interest rates because he wants a faster-growing economy, which would actually strengthen the dollar.
What Does Warsh’s Appointment Mean?
It’s still not certain that Trump will choose Warsh, and an announcement is expected either on Friday or early next week. But, if he does, it would be a clear signal that Trump does not, in fact, want a weak dollar. In his time at the Fed (back during the Great Financial Crisis), Warsh was notoriously hawkish, worried more about inflation than the jobs market, even as the economy turned negative.
So, why would Trump pick Warsh (reportedly at the instigation of Bessent)? Warsh is a strong advocate for lowering interest rates. But, he also wants the Fed to wind down its Treasury and mortgage-backed securities (MBS), which is a decidedly hawkish stance. It’s speculated, though he hasn’t said so explicitly, that he would like to cut rates to compensate for a much more aggressive quantitative tightening (QT) program. That would lower rates as Trump wants, but also pull down inflation as money is drained from the system. It is also the opposite of the policy currently being pursued by the Fed, which cut rates three times in a row and is actually buying Treasuries. If he manages to pull it off – a big if – then the dollar would likely strengthen while weighing on Gold ( XAUUSD).
