Gold & Silver: A Volatile Day, Not a Broken Thesis

"Volatility is part of the journey, not a signal that the thesis has changed."

By Jim Nelson, CFA, Euro Pacific Asset Management

Today’s sell-off in precious metals was painful to watch, especially after a strong run. Gold saw one of its sharpest one-day drops in decades and silver had an even steeper down move, driven largely by a surging U.S. dollar, profit-taking after an extended rally, and a sudden reset in rate expectations. The most important point is this: a sharp down day does not mean the long-term thesis is broken. We’ve always said markets don’t move in a straight line, and precious metals—by their nature—tend to deliver their volatility in bursts.

The fundamental backdrop that supports precious metals has not improved for the dollar or for long-duration bonds. In our view, the Federal Reserve simply does not have the luxury of being meaningfully hawkish for very long in a world of heavy Treasury issuance. The supply of government debt remains enormous, foreign demand is less dependable at the margin, and domestic investors are increasingly price-sensitive—meaning they demand a higher return when they’re asked to absorb more duration and more issuance. That dynamic matters because if policy stays too tight for too long, the risk is not theoretical—it’s dislocations in funding markets and dysfunction in Treasury market liquidity. In that environment, the Fed’s bias over time is toward keeping markets functioning, even if that means leaning back toward easier conditions when stress shows up.

Second, the U.S. investment deficit with the rest of the world remains a slow-moving but powerful force that can pressure the dollar over time, and in our view this process is already underway. The U.S. net international investment position is deeply negative, which means the rest of the world owns substantially more U.S. assets than Americans own abroad. When a country depends on ongoing foreign capital inflows to finance both fiscal deficits and external deficits, the marginal shift in foreign preferences matters. Even if foreign participation in Treasuries remains large in aggregate, the composition of foreign demand can change, and the “automatic bid” the dollar enjoyed in prior cycles becomes less reliable. A softer dollar is historically supportive for precious metals.

Third, easy fiscal policy is the long-run inflation risk, and it effectively forces real rates lower over time. The deficit remains structurally large, and what makes it difficult to reverse is that the majority of federal spending is not truly discretionary. Mandatory spending and net interest consume most of the budget before Washington even begins debating annual discretionary appropriations. Persistent deficits in that kind of structure tend to produce some mix of lower real rates, liquidity support, and financial repression over time, because the alternative is allowing rates to rise to levels that create severe strain in funding markets and in government financing.

So while today’s move was violent, we view it as a classic two-way market moment rather than a change in the core fundamentals. A crowded trade can unwind quickly when the dollar and rate expectations shift. That’s uncomfortable, but it’s also normal in strong secular trends. We remain focused on the same drivers we’ve been discussing: the trajectory of deficits and Treasury supply, the limits of how tight policy can remain without creating market stress, the U.S. external financing imbalance and its implications for the dollar, and the structural demand for gold that tends to persist well beyond any one day’s headlines.

Bottom line: we do not see a fundamental reason to turn bearish on precious metals because of today’s drawdown. Volatility is part of the journey, not a signal that the thesis has changed.

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