When we last wrote about Gold in October 2025, the yellow metal was up 58%, on route to its 2^nd best calendar year return in the last half century and vastly outperforming the S&P 500, the Bloomberg U.S. Aggregate Bond Index, and Bitcoin. Since then, while volatility in stocks and bonds has remained low, precious metals have skyrocketed, with the focus turning to Silver, or what market participants have dubbed: “Gold on steroids.” Indeed, the frenzy got so great that the white metal peaked at $115.50 on January 29^th, up nearly 300% since the start of 2025, before subsequently correcting 37% the next day. 

What caused the rally?

There are numerous macro and micro factors that can influence precious metals, and our qualitative assessment suggests that the stars almost entirely aligned to push prices higher.

• Inflation hedge: With forward expectations extremely stable around 2.5%, the market does not appear concerned about runaway inflation.
• Recession hedge: Stocks are near record highs and corporate spreads are near their all-time tights, suggesting risk markets remain sanguine.
• Geopolitical Risk Hedge: In the wake of recent events in Venezuela and Iran, geopolitical risks have been rising, resulting in a safe haven premium for real assets.
• Central Bank Easing: Despite the Federal Reserve (Fed) holding interest rates steady at their February meeting, the Federal Open Market Committee (FOMC) still maintains an easing bias and the market continues to price 50 basis points (bps) of rate cuts over the next 2 years; gold and silver historically rally when real rates are declining.
• De-Dollarization / Weaker US Dollar (USD): Although we haven’t seen an exodus out of US stocks and bonds, Gold and Silver have served as an outlet for fears around de-dollarization and dollar de-basement. With President Trump ratcheting up rhetoric over Greenland and allies questioning whether there is a rupture in the global order, investors have turned to Gold and Silver to hedge against over-exposure to the USA and expectations for a weaker USD. Furthermore, fears around unsustainable fiscal deficits have prompted investors to prefer real assets as the best store of value. It is worth noting, however, that Bitcoin has not participated in the rally.
• ETF + Central Bank Demand: Central banks continue to buy Gold to diversify their reserves despite higher prices, and inflows into Gold and Silver ETFs have remained incredibly strong since 2024.
• Supply / Demand Mismatch: Supply is generally inelastic in the precious metals markets and unable to keep pace with the aforementioned demand. Silver, in particular, felt the squeeze as unlike Gold, it also serves a practical purpose and is used in a range of products like circuit boards and solar panels. It is also a much smaller market, with only ~$50bn stored in London versus ~$1T of Gold.
• Global Inventory Mismatches: The potential for Section 232 tariffs on Silver led to large imports into the US, leaving inventory on the London Metal Exchange (LME) lower than usual. Dwindling stocks combined with the aforementioned ETF inflows (backed by physical silver) created a squeeze on prices.
• Speculation / Momentum: As prices continued to ratchet higher, momentum traders piled on, while many retail investors feared missing out.

Why did prices correct so dramatically?

While there were many justifiable reasons for Gold and Silver to rally, the speed and magnitude of the increases suggested a bubble was forming, particularly in Silver, and predominately from speculation in China. Indeed, there were several warnings flags:

1. The premium for Shanghai silver over London Silver peaked at $37. This typically trades around $2-3.

2. The Silver ETF trading on the Shanghai exchange had to periodically halt new subscriptions and warn investors that the ETF was trading at an unstainable premium relative to the underlying collateral.

3. Exchanges across the globe were raising margin requirements for Gold and Silver.

4. This year, the majority of the price action has come between 4pm and 6pm EST, a highly illiquid time after US trading closes but before Asian markets open.

5. Option activity suggested a wave of call purchases, forcing dealers to buy futures to hedge their exposure and pushing prices higher.

Taken together, the conditions were ripe for a squeeze, and all it took was a headline that President Trump would nominate Kevin Warsh to lead the Fed for the markets to unravel. Warsh’s previous experience as a Fed Governor suggest he will be a tough inflation fighter and look to reduce the Fed’s balance sheet, which caused the USD to move higher as the market reassessed the debasement trade. Even if he is unable to actually enact his preferred policies, the slightest dent in the precious metals narrative was enough to trigger a massive unwind of crowded positioning.

Where do we go from here?

While prices are still up dramatically from the start of 2025, they are starting to consolidate around more fundamentally grounded levels and positioning is becoming cleaner; however, volatility is likely to remain abnormally high in the near future. We continue to believe that the move in precious metals is telling us little about inflation or recession probabilities. Instead, it is a function of continued central bank and ETF flows, de-dollarization fears, and a desire to hold real assets in the face of large fiscal deficits. Combined with growing supply/demand mismatches, distorted inventories, and less liquidity relative to equity and fixed income markets, prices should remain elevated.

Given that these themes are here to stay, we think Gold over $5,000 by year end is a very realistic surprise. Using the gold/silver ratio as a historical proxy, the fair value on Silver is closer to $75, although given the momentum in the market, a 1-2 standard deviation premium would imply $90-$110.

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