After the Gold and Silver Crash: Why Bottom Fishing Is Not Recommended Right Now

On Friday Eastern Time, Trump nominated Kevin Warsh as the new Federal Reserve Chair. Warsh's forecasting record during his tenure as a Fed Governor skewed hawkish, with nearly zero tolerance for inflation; Deutsche Bank believes he is likely to adopt a unique policy mix of concurrent interest rate cuts and quantitative tightening to combat inflation while supporting the dollar.

From a policy stance, rate cuts would weigh on the dollar, but his other advocacy—quantitative tightening (QT), or reducing the balance sheet—essentially drains dollar liquidity from the market, making the currency scarcer and providing upward momentum. This creates a bearish outlook for dollar-denominated commodities like gold and silver.

Furthermore, there is a tension between Warsh's hawkish economic views and his political expressions of loyalty to Trump. Sean Callow, a senior market analyst at ITC Markets in Sydney, stated that it is difficult for the market to forget his long-standing hawkish track record. Bloomberg strategist Brendan Fagan noted that the nomination of this hawk could alleviate concerns regarding the Fed's independence, as expectations that the central bank might yield to political pressure or abandon its inflation fight would drop significantly. Market reactions suggest that Warsh's nomination has reduced economic policy uncertainty, thus turning bearish for traditional safe-haven assets like gold and silver.

However, the Warsh nomination was not the only factor.

Last Friday, CME Group announced an increase in margin requirements for Comex gold, silver, and other precious metal futures contracts, effective after the close on Monday (February 2). Notably, this is not the first recent adjustment. In mid-January, CME modified a key mechanism, shifting the margin calculation for contracts such as gold and silver from a fixed amount to a dynamic float based on a percentage of the contract's notional value. Analysis suggests that following this crash, the actual effective rates have reached the 8%–16.5% range.

This series of adjustments means that maintaining the same position size in precious metal futures requires more cash or equivalent assets. Due to higher carrying costs, many retail investors unable to meet margin calls are forced to liquidate, further striking at bulls and intensifying the decline.

Additionally, Felix Preh, a former investment banker and founder of Goat Academy, pointed to a 'conspiracy' behind this epic crash: the plunge coincided with simultaneous system outages at the London Metal Exchange (LME) and HSBC, along with CME's sudden margin hike. The timing precisely aligned with the weekend closure of Asian markets, a period of thin liquidity when any market movement is sharply amplified.

Felix observed that JPMorgan Chase (JPM) precisely covered its silver short positions when the market hit its lows last Friday. He believes this crash not only flushed out retail investors but also provided commercial shorts, represented by banks, with an opportunity to cover positions and reset market sentiment, which may have been the true objective.

By the end of January, the implied volatility of Comex gold futures had risen to its highest level since the peak of the pandemic in March 2020. On January 29, the Silver Volatility Index even climbed to 111, setting a new record high.

Another noteworthy piece of information is that since 2026, the Relative Strength Index (RSI) for both gold and silver has indicated they are overbought: gold's RSI touched 90, and silver's RSI reached 93.86, the highest level since 1980. This data indicates that the market has entered a state of extreme frenzy.

Analysts believe that both the recent surge and the current ongoing downturn are manifestations of a gamma squeeze. During the rally, large-scale retail buying of gold and silver call options forced market makers to buy equivalent amounts of spot or futures to hedge their risk, accelerating the price increase. Once prices began to fall, market makers unwinding long positions further exacerbated the decline.

Despite suffering an epic blow, Wall Street remains broadly optimistic about the long-term outlook for precious metals.

UBS (UBS) significantly raised its 2026 gold price targets: targets for March, June, and September were increased to $6,200, a 24% hike from the previous target of $5,000 per ounce. Following the plunge in gold prices, Deutsche Bank maintained its bullish stance, keeping its gold price target at $6,000. JPMorgan also remained bullish, raising its year-end 2026 gold price target from $5,400 to $6,300 per ounce, citing persistent and strengthening demand from central banks and investors.

However, regarding the short-term outlook, many institutions have adopted a more cautious tone. Tim Waterer, chief analyst at KCM Trade, warned that the ripple effects of forced liquidations following margin hikes are still playing out, making it premature to declare a bottom. Analysts at ING pointed out that gold's short-term price action depends on the extent of dip-buying by Chinese investors; however, with heightened volatility and the approaching Lunar New Year, thin liquidity could lead to further declines, suggesting a wait-and-see approach for now.

Regarding silver, Wall Street is even more cautious. JPMorgan noted that without central banks acting as structural floor buyers, silver could experience more severe volatility than gold in the short term. Bloomberg Senior Strategist Mike McGlone previously warned that silver was at its most overbought level since the Hunt Brothers event in 1980, suggesting that silver might re-stabilize around $50 per ounce.

This content was translated using AI and reviewed for clarity. It is for informational purposes only.