Gold Tumbles 20% Since Warsh Nomination

The price of gold fell the most in more than four decades since Friday as markets reevaluated their expectations for US monetary policy after Trump announced Warsh as Powell's successor as Fed Chair.

The Key Developments

• Trump appoints relatively "hawkish" Kevin Warsh to succeed Powell as Fed Chair.
• Gold, precious metals, and the Nasdaq tumble after the news, as markets focus on the Fed's balance sheet rather than interest rates.
• Warsh's appointment signals that the Trump Administration is not pushing for a weaker dollar, allowing the greenback to recover.

Trump Appoints a "Hawk" to the Fed

Gold's meteoric rise last week was suddenly cut short on Thursday amid reports that US President Donald Trump had selected Kevin Warsh as his nominee to replace Fed Chair Jerome Powell in May. The news caught the market by surprise, and gold erased all weekly gains, falling as low as $4,700 before bouncing back to $4,839 at the closing bell on Friday. That was almost a $900 move in less than 48 hours. The yellow metal resumed its downward trajectory on Monday, breaking below $4,500 after the CME raised margin requirements amid volatility in precious metals. Part of the large move can be traced back to the spike higher on Tuesday when Trump appeared to say he wanted a weaker dollar. After his remarks, the dollar index fell to a four-year low, as traders turned to gold as a store of value. With Trump campaigning to lower rates, the appointment of Kevin Warsh among the potential candidates came as a significant surprise, as he is considered the most hawkish. Following confirmation that Walsh was the nominee, the dollar index rose back to its level from before Trump's comments on a weaker dollar.

However, "hawkish" needs to be understood in context, as all of the potential nominees for Fed Chair have been quite vocal about cutting rates at this juncture, an apparent condition for consideration. Notably, throughout the turmoil surrounding Trump's comments and Warsh's appointment, the odds of further rate cuts for the rest of the year remained essentially the same. He's seen as a fairly conservative pick, having served as a Governor on the Fed during the subprime crisis, which provides market confidence. Moreover, he's just one vote out of 12, and, although the Chair has "persuasion power", it's still a majority vote that determines monetary policy.

Why the Huge Market Reaction to Warsh?

The break above $5,500 in gold was an excellent time to take profits, which could help turn the market. However, the appointment of Warsh likely led many traders to reevaluate their assessment of the White House's view on monetary policy. The thought was that Trump wanted a weaker dollar to help exports and was overriding the "strong dollar" view of US Treasury Secretary Scott Bessent. Warsh is considered an "insider" at the Fed and has close ties to the Treasury Secretary, and both have argued that the Fed's Treasury holdings are excessive and should be wound down (and debt levels should be managed by the Treasury). Even if the FOMC decides to cut rates, reducing the balance sheet (QT) would be overall hawkish, as it would ease inflationary pressures by shrinking the money supply. Both of those aspects are negative for gold and other precious metals. However, tighter liquidity could weigh on the stock market, which explains some of the Nasdaq's underperformance on Thursday and Friday. As for where the market goes from here, that will likely depend on what Warsh says about his current monetary policy views, which could come as soon as today. 

Gold Dead-Cat Bounce Could Be Forming

Gold’s crash from the peak of $5,600 to a Monday low of $4,400 has brought prices below the middle VWAP at 4,830, keeping short-term bias down. Interestingly, the major resistance of $5k sits right at the 50% Fibonacci retracement of the bearish leg, forming a magnet zone that could offer a bounce before further deterioration. Typically, extreme drops, such as the one in gold, lead to a dead-cat bounce to the 38.20%-61.80% area, with the first resistance at $4,850 and the extended one at $5,130. As the first level has already been retested, immediate continuation would expose the lower VWAP at $4,260, which sits below the swing low at $4,400.

Source: SpreadEX | Gold, Daily Chart