Gold suffers from deleveraging wave but remains a diversifier

Highlights: Gold and Silver saw extreme volatility last week, as the nomination of Kevin Warsh for the Fed chairmanship was viewed as hawkish news, triggering quick deleveraging of crowded positions. While the prior rally to USD5000/oz was substantiated by USD diversification and geopolitical uncertainty, the move above that had been mostly momentum-based and related to large call option buying. Gold may remain volatile while positions are being adjusted. But we do not think that the Warsh nomination will trigger the end of USD debasement fears or central bank buying. Hence, we see gold consolidating in coming weeks, with a possible return above USD5000/oz when geopolitical uncertainty spikes. Importantly, the gold weakness illustrates that excessive reliance on it as the sole diversifier is not a good strategy; we need to diversify our diversifiers.

• Throughout 2025, the gold rally was primarily based on USD weakness, heightened global uncertainties, expectations of Fed rate cuts and the desire to diversify to avoid excessive USD exposure (the ‘debasement trade’). That also put gold and silver on track for their best January since 1980, till the volatility hit last week
• Most of these factors remain in place. But the trigger of the volatility was the Warsh nomination, which caused selling at the China opening, where relatively low liquidity exacerbated the moves. Later in the day, high trading volumes of leveraged ETFs illustrated the impact of technical unwinding. However, there are no reports of central bank sales and we would doubt that there would be any change to their policy to accumulate gold
• The Warsh nomination on its own does not explain what happened in gold. In fact, the rate market hardly changed its expectations of rate cuts over the next two years, and the two-year Treasury yield actually moved down a bit. Warsh became a critic of quantitative easing when he left the Fed and can hence be seen as slightly hawkish. To the extent that this increases the credibility of the Fed, this should be good for risk assets and slightly reduce the demand for gold. But we doubt that the nomination will end investors’ worries about excessive concentration in USD and US assets
• We think that position adjustments, and the CME announcement of higher gold and silver margins can keep volatility elevated for now. But we think prices should find support, based on fundamental demand, while leverage and the extent of future rallies will become more limited