Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street shrugged off last week's historic selloff in precious metals, which continued on Monday, and the dollar rose again as investors took their cue from strong U.S. and global manufacturing data, earnings, and an apparent detente between the U.S. and Iran.

More on that below. In my column today I look at how the naming of Kevin Warsh as U.S. President Donald Trump's pick to be new Fed Chair sparked Friday's historic collapse in precious metals prices. But the 'debasement' trade is far from over. 

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* Managing the precious metals spillover

The slump in precious metals prices continued on Monday, extending Friday's historic slide that saw silver and platinum have their worst days ever, and gold have its biggest fall since 1983. Gold fell another 4%, silver another 7%.

But this leg of the selloff appears more contained - Asian stocks crumbled but Europe and the U.S. shrugged it off. Managing risk exposure and protecting wider portfolios is key for fund managers now - 10-day realized volatility in silver hit 186% on Friday, according to Pepperstone's Chris Weston.

* Everybody's talking about ISM

U.S. manufacturing has gotten off to a strong start this year, with the ISM manufacturing PMI jumping to 52.6 in January. Although parts of the report were downbeat, it marked the strongest growth in nearly four years, a surprise to all 56 analysts in a Reuters poll who predicted another month of contraction. 

It fits the wider narrative of solid U.S. growth, with the Atlanta Fed's GDPNow model for Q1 running at an annualized 4.2%. Even if underlying growth is a bit slower, it begs the question - with inflation comfortably above target - why is the Fed still expected to cut rates this year?

* Anything EU can do...

The U.S. and India struck a trade deal on Monday, which will see tariffs on U.S.-bound goods cut to 18%, and duties on India-bound shipments eliminated, according to U.S. President Donald Trump. India will also buy $500 billion of U.S. energy, tech, agricultural, and other products, Trump said.

This follows the comprehensive EU-India trade agreement struck last week after two decades of talks. Treasury Secretary Scott Bessent expressed disappointment in that deal, but it may have focused minds in Washington to get this one wrapped up quicker.  

How much of the recent mania for gold and silver was fueled by U.S. dollar "debasement" fears? Quite a lot, judging by the crash in precious metals on Friday following U.S. President Donald Trump's announcement of former inflation hawk Kevin Warsh as his pick for the new Federal Reserve chair.

Broadly speaking, if we have a Fed that is now even more opposed to "money printing," the "debasement" trade is diminished, and 'hard' assets like precious metals lose their luster.

The collapse was truly historic. Platinum and silver posted their biggest one-day losses on record, falling as much as 20% and 30%, respectively, and gold plunged 10% for its steepest fall since 1983.