Gold and silver plunge again

The chase is on for gold and silver medals in the Dolomites, as the winter Olympics get under way this week. In the markets, however, investors are running in the opposite direction after a spectacular bursting of the precious metal bubble.

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Renewed rout

Gold and silver tumbled again after the weekend as investors continue to assess President Trump’s nomination to replace Jerome Powell at the Federal Reserve.

Kevin Warsh is seen as a serious hard-money economist, who is unlikely to be pushed by the White House into aggressive, and inflationary, interest rate cuts.

At a stroke that has removed one of the key drivers of the recent stampede into gold and silver, widely viewed as safe havens in an uncertain policy environment.

Gold fell another 7% to just over $4,500 an ounce. It has fallen by around 20% since last Thursday. Silver, meanwhile, which has outpaced gold in the most recent, highly speculative phase of the precious metal rally, tumbled by 13% to $74. The junior metal had briefly touched $120 last week, after rising four-fold in a year.

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Stocks spillover

The turmoil in commodity markets spilled over into stocks, as markets re-opened on Monday. Leveraged investors, who had borrowed to buy gold and silver, were thought to be liquidating other assets to meet margin calls.

That meant that the market’s recent high-flyers were in the spotlight, with Korea’s buoyant Kospi index an early target for cash-strapped investors. Tech stocks like SK hynix and Samsung were hardest hit.

The targeting of high-flying tech stocks rekindled fears that had seemed to ease recently of a bursting AI bubble. Last week, the value of Microsoft fell by $360bn as the US company announced a surge in data centre spending, reigniting fears about the sustainability of Silicon Valley’s vast investment in AI infrastructure.

In other markets, oil was sharply lower, with the Brent benchmark down 5% at $66 a barrel. Copper and aluminium, two industrial metals that had also been caught up in the recent rally, fell by 3%.

Jittery backdrop for central bank meetings

The precious metal rout provides a nervous environment for markets in a big week for central banks.

Both the Bank of England and European Central Bank announce rate decisions on Thursday. Both are expected to leave rates on hold.

The Bank of England is widely forecast to hold rates at 3.75%, with a majority of rate-setters focused on elevated wage growth and just a couple of dissenters pushing for a further cut in the cost of borrowing to support the economy.

Despite this, the Bank will probably signal further cuts later in the year as policies introduced in the Budget weigh on prices and the impact of a stronger pound feeds into the economy.

The ECB meanwhile is widely expected to hold its policy rate steady at 2%. In Europe, inflation is bang on the central bank’s 2% target and a strong euro - above $1.20 for the first time since 2021 - is likely to keep prices in check.

Takaichi’s big election gamble

Over in Asia, the focus is on Japan’s snap general election on Sunday. The country’s first ever female prime minister has gone to the polls to seek a mandate for her fiscal spending and tax-cutting policies, after winning the leadership of the ruling Liberal Democrats last November.

She is trying to cash in on high personal popularity and a warm welcome from the stock market for her reflationary policies, designed to address a growing cost of living crisis in Japan, which is having to cope with the first serious price rises - especially for food - after decades of deflation.

Earnings on track

Meanwhile, with so much going on in financial markets around the world, it is easy to forget that the main driver of share prices in the long run is corporate earnings. With around a third of the S&P 500’s constituent companies having reported results in the ongoing fourth quarter results season, around 80% are beating expectations by an average of nearly 10%.

That is a repeat of the trend in recent quarters and points to another strong year as a whole for earnings growth of perhaps 13%, compared to 2024’s 11.4%. Forecasts for continued growth this year and next of around 15% look plausible. Investors will hope that the fundamentals will be enough to help markets navigate the current precious metal turbulence.

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