Precious and industrial metals tumbled on Friday as traders sought to crystallize recent gains following a powerful rally earlier in the week. The retreat came as market participants reassessed the likelihood of quick, deep U.S. interest-rate cuts and as the dollar strengthened, making dollar-priced commodities more costly for holders of other currencies.
President Donald Trump said on Friday he had chosen former Federal Reserve Governor Kevin Warsh to head the U.S. Federal Reserve. The announcement contributed to a firmer dollar index - the gauge of the U.S. currency versus peers - as markets increasingly priced in a more measured approach to monetary easing under Warsh.
"The market thinks Kevin Warsh is rational and that he wont push aggressively for rate cuts," said Panmure Liberum analyst Tom Price. "Generalist investors who have different agendas - like protecting capital - are taking profits." A stronger U.S. currency tends to reduce demand for dollar-priced metals among holders of other currencies, and that dynamic was felt as traders adjusted positions.
Investors also noted that recent moves were amplified by thin liquidity. Both gold and silver had surged strongly in January, up 17% and 39% respectively so far this month, prompting a wave of profit-taking in the last session of the month after several sessions where small flows driven by fear of missing out produced outsized price action.
"Both gold and silver were ripe for a correction given the highly speculative and unhinged nature of the latest surge," said Ole Hansen, head of commodity strategy at Saxo Bank. Independent analyst Ross Norman added: "Precious metals have discovered gravity. It's brutal, but speculators have been reminded these are two-way markets."
By 1201 GMT, gold was down 4.7% at $5,143.40 an ounce and silver had fallen 11% to $103.40 after each metal hit fresh records on Thursday of $5,594.80 and $121.60 an ounce respectively. The sharp intraday reversals underlined how speculative positioning and model-driven trading can accelerate moves when sentiment shifts.
Copper, which had climbed to an all-time high of $14,527.50 a metric ton on Thursday, slipped 1.1% to $13,465. The industrial metal has risen about 6% this month following an 11% gain in December. Macquarie analyst Alice Fox noted that lingering fund flows into what is still a relatively small and crowded market are likely to keep prices elevated and volatile.
Traders said a further pullback in copper, aluminium and other exchange-listed industrial metals was possible in the days before the Lunar New Year holiday on February 16, when China - the world's largest metals consumer - will close for a week. "Chinese punters will not want to have any positions in these volatile markets," Price said, pointing to the risk of holding positions into a period of reduced activity and potential gap risk.
Market participants also highlighted the role that funds and algorithmic strategies play in todays trading environment. Many funds use buy and sell signals generated by numerical models, and a stronger dollar and shifting policy expectations can trigger systematic selling that compounds directional moves.
The market's rapid retracement after record prints emphasized the fragile nature of recent rallies and the influence of liquidity and positioning on price outcomes. For now, traders appear to be prioritizing capital preservation and pruning speculative exposure ahead of a typically quieter holiday period in Asia.
Summary: After recent record highs, gold, silver and copper fell as investors took profits amid reduced expectations for aggressive U.S. rate cuts and a firmer dollar following the selection of Kevin Warsh as the Fed nominee. Thin liquidity and model-driven flows intensified the declines, and traders expect heightened volatility into the Lunar New Year holiday.
Key points:
- Markets priced in a more measured U.S. policy path after President Trump announced Kevin Warsh as his choice to lead the Federal Reserve, helping to strengthen the dollar.
- Profit-taking following large January gains (gold up 17%, silver up 39% this month) and thin liquidity contributed to sharp corrections in precious metals.
- Industrial metals, led by copper, remain elevated and volatile, with traders wary of holding positions into the Lunar New Year holiday when China will be closed for a week.
Risks and uncertainties:
- Policy uncertainty - Market expectations about U.S. interest-rate paths could shift, affecting the dollar and dollar-priced commodities, particularly impacting precious metals and industrial metals demand.
- Liquidity risk - Thin trading conditions and model-driven flows can magnify price moves and increase short-term volatility for metals markets.
- Holiday risk - The upcoming Lunar New Year shutdown in China raises the possibility of position closures and additional volatility in metals ahead of the holiday, affecting global metals markets.