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South central kansas | From Macromicro.
What You Should Know
Gold returned 65% in 2025, marking the highest annual gain since 1979. Entering 2026, global markets faced successive geopolitical disruptions in Venezuela, Iran, and Greenland, alongside Trump's interference with Federal Reserve independence. "Safe-haven plus FOMO" sentiment drove gold formally above $5,000 per ounce, while silver, propelled by physical supply gaps and Shanghai-New York arbitrage mechanism failures, experienced near-parabolic momentum, with New York silver futures briefly touching a record high of $121 per ounce.
Within less than a week, precious metals markets reversed violently through their most extreme volatility on record. Silver plunged 30% in a single day, gold fell 13%, with the two metals evaporating over $6 trillion in market
This violent precious metals volatility stemmed from three domino events: regulatory crackdown (CME consecutively raising margin requirements), policy expectation reversal (Trump nominating Kevin Warsh), and ultimately triggering a liquidity stampede (coinciding with thin liquidity during contract rollover, forcing mechanical position closures by market makers). Historical experience shows regulatory intervention often catalyzes silver price collapses. During the 1980s Hunt Brothers incident, CME implemented "Silver Rule 7," permitting only position closures while prohibiting new positions, issuing $100 million in margin calls that ultimately triggered silver's collapse. In 2011, CME raised silver margins five consecutive times within roughly two weeks (nine trading days).
Tightening Meets Its Limits
Trump's January 30 announcement nominating Kevin Warsh as next Fed chair triggered immediate market reactions. The dollar index recovered above 97, while precious metals collapsed.
Warsh's Tightening Talk
Market instinct often labels Warsh as "the hawkish official who resigned in 2011 opposing QE2," sparking fears of tighter monetary policy. However, his recent statements reveal a more nuanced position. He advocates "shrinking the balance sheet in exchange for rate cuts," believing AI-driven productivity growth has disinflationary properties that eliminate the need for the Fed to suppress demand with high rates. His goal centers on rebuilding fiscal discipline and restoring Federal Reserve credibility, redirecting credit resources from large financial institutions toward the real economy.
Why QT Won't Happen: Feasibility Issues
Warsh's policy stance combines superficial hawkish and dovish elements. Balance sheet reduction faces near-term execution barriers. The more viable path involves loosening financial regulation to reduce bank reserve requirements before creating conditions for subsequent balance sheet reduction. Warsh's conviction that AI-driven productivity gains will suppress inflation clarifies the rate cut direction, aligning with our inflation trajectory assessments.
While Warsh's statements lean hawkish on balance sheet reduction, we believe this faces practical constraints and remains difficult to execute near-term, limited by two major factors:
Liquidity constraints: The Fed recently resumed bond purchases to ease year-end liquidity tensions. Against this backdrop, shifting toward balance sheet reduction, or even just halting purchases, would inevitably push overnight rates back up, breaking above the target rate corridor ceiling. Especially entering April tax season, when the Treasury General Account will significantly absorb market funds, market conditions cannot permit the Fed to further withdraw liquidity.
Fiscal constraints: Balance sheet reduction inherently contradicts Trump administration preferences toward fiscal expansion. DOGE's fade last year demonstrated Trump lacks fiscal austerity intent. With debt burden concerns and weakened market appetite for Treasuries, the Fed has become among the largest Treasury buyers. In other words, if the Fed withdraws now, fiscal operations face practical difficulties.
Near-term balance sheet reduction therefore remains unlikely as a Fed policy direction. More probable are compromise approaches, such as accelerating MBS sales and rotating positions into Treasuries, reducing intervention in private markets without tightening overall liquidity. Based on these constraints, near-term balance sheet reduction remains unlikely, making the gold selloff appear more like a knee-jerk reaction to headline hawkishness rather than fundamental deterioration.
Edited by zenfarm 2/13/2026 12:51
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Gold and the FED
