In Schroders’ view, the recent correction in precious metals is primarily a de‑leveraging event originating in the silver market.

By James Luke, Senior Portfolio Manager, Gold and Commodities at Schroders

Silver prices increased to extreme levels in the early part of this year. This was initially led by significant Chinese participation from November, and more recently by inflows into highly leveraged US silver exchange-traded funds (ETFs).

That retail influence is now being “liquidated”, whether triggered by the nomination of Kevin Warsh as next Federal Reserve (Fed) Chair, margin hikes, or trading bans in China. Just as silver has been leading gold higher over the last two months, it is now also putting downward pressure on the commodity.

We believe the Warsh nomination is the core trigger for investors asking “why now?”.  The associated narrative of a potential “regime change” at the Fed- implying a smaller balance sheet challenges the “debasement trade” of which gold has been a core expression.

From here, we see three potential outcomes:

1. Consolidation: Markets take the idea of a “regime change” seriously, leading to a period of choppy trading as overbought conditions unwind. Technical damage triggers selling, and investors are spooked by the volatility of a supposedly “safe haven” asset.
2. Sharp recovery: Markets see through the “regime change” idea, prompting central banks and investors to buy the dip in gold, as we are already seeing in Singapore.
3. Secular high is in: A scenario where the US economy is navigated along a very narrow path that ends the era of easy money. This delivers an AI productivity boom that drives high growth (but not unemployment), and - aided by Trump tariffs, re-shored industry and reduced trade deficits - brings about a period of debt/GDP deleveraging and a strong dollar.  

Internally we are debating the first two outcomes, while the third, in our view, is unlikely, but cannot be ruled out.

The current sell off is reminiscent of November 2024 when Trump took office. He promised DOGE (Department of Government Efficiency) and fiscal discipline, as well as to remove the US from foreign wars. That narrative, was enough to spook the gold market, which served big outflows in global gold at the time, even though, in our view, there was a very low probability of it ever happening. This time, however, the correction is much bigger because we have seen a historically unprecedented move in silver and the starting point is significantly higher gold prices.

We believe the fiscal realities of today are vastly different to the Volcker period, which makes us sceptical of what a Warsh-led Fed can really do.  

Our long-term view remains unchanged:

The secular top will be reached when either the geopolitical and fiscal drivers are resolved (ushering in a new status quo) or demand itself is undeniably saturated. We don’t think either of those requirements are near to being met.