Warsh weighs on the Gold and Silver as Dollar debasement trade on pause

Donald Trump announced that Kevin Warsh would be his pick to replace Jerome Powell as Fed chair. He was one of the front runners, but in recent weeks Warsh had fallen out of favour with prediction markets.

Warsh was a Fed governor between 2006- 2011, so he has a solid background in monetary policy, he is also a Wall Street guy and was considered one of the Fed’s most hawkish members when he was a governor; he was also vocal in his criticism of QE.

Market prices in prospect of a hawkish Fed chair

The knee jerk market reaction has been hawkish. Gold and silver have slumped; Treasury yields are slightly higher and the dollar is the top performer in the G10 FX space. The market is rotating out of the dollar debasement trade on Friday, but is this too premature?

Dovish Warsh won’t get an easy ride through Congressional confirmation

There are two factors to consider here: 1, Warsh has changed his stance in recent months and has become a lot more dovish, which is probably why Trump picked him to be Fed chair. 2, it will not be easy for Warsh to get confirmation from Congress, as Trump faces accusations of eroding Fed independence. Already on Friday, Republican Congressman Thom Tillis has said that he will oppose the President’s nomination of Warsh as Fed chair until the federal probe of Jerome Powell is resolved. Thus, if Warsh has shifted from a hawk to a dove, it could take time for rate cuts to feed through.

Will bargain hunters pick up gold on the lows?

We still don’t know what will happen, who will be the next chair and how they will try and manipulate policy. Thus, the selloff in gold and silver seems extreme. After rallying strongly this year, the moves in precious metals over the last 24 hours has taken some froth off the market, the question now is, will this attract bargain hunters? Gold is approaching $5,000 per ounce, and is down $290 so far today. Silver is also down 13%, and is testing the key $100 level.

Warsh: Safest pick for next Fed chair

Overall, Warsh is the safest pick for the next Fed chair. He  may be better at forming a consensus view among FOMC members, and he has respect from global central bankers, former BOE governor Mark Carney, praised him this morning. This suggests that the dollar debasement trade could take a pause, and the greenback may recover as gold struggles.

Stocks remain resilient  as Mag 7 go their own way

Elsewhere, the incredible decline in precious metals prices in the past 24 hours is not weighing on the FTSE 100 and European stocks are a sea of green. UK-listed gold and silver miners are under pressure today, and the materials sector on the FTSE 100 is down 2.6%. US stocks are also eroding early losses, even though tech is one of the weaker performers. Meta is down 2.25%, and is giving back some of Thursday’s 10% gain, and Microsoft has stabilized after it fell 10% yesterday. Earnings season is not having a uniform impact on the Mag 7, and their stock prices are driven by company specific factors right now.

Record revenues can’t stop Apple from sliding

Apple is also lower today, and its stock is down by 2% even though it reported record revenues for Q4. The market is concerned about margin pressures at Apple as memory prices for iPhones surge. There is also some concern at the lack of progress in AI, which has thwarted Apple’s share price gains in recent months.

Overall, markets are jittery, and the main theme is the selloff in commodities and the choice of Kevin Warsh as the next Fed chair. The dollar debasement trade has been put on hold for now, this does not mean that it is over. Signs over the weekend that Warsh will vote for more rate cuts could see gold recover and the dollar fall as we enter February.

Chart 1: Gold, what goes up must come down