The nomination of Kevin Warsh to lead the Federal Reserve will not derail the global “debasement trade,” as mounting public debt makes the monetization of U.S. fiscal deficits inevitable.
Despite the “bone-jarring” Friday crash that saw silver plunge 26% and gold drop 9%, the fundamental drivers of the precious metals rally remain unchallenged.
According to economist Robin Brooks, the market’s search for safe havens is fueled by a fiscal trajectory that no single personnel change can fix.
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“On a fundamental level, the nomination of Kevin Warsh changes nothing about any of this,” Brooks noted in his Substack post, pointing to a “reckless path” of fiscal policy.
“Public debt is high and rising. This pushes up longer-term yields, which makes it inevitable that political pressure on the Fed to cut interest rates and cap longer-term yields will mount.”
Treasury yields fell following the announcement, and futures prices moved to reflect additional rate cuts. This suggests that the market expects Warsh to be “dovish on interest rates,” a stance that provides a fundamental tailwind for hard assets.
Brooks argues that the political reality of the incoming administration will dictate Fed policy more than individual ideology.
“Indeed, the worst possible nightmare for Warsh must be to have Trump turn on him the way he turned on Powell. The only way to avoid this happening is to cut hard and fast ahead of the midterm elections.”
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The recent volatility in silver and gold is being characterized as a “modest” setback rather than a trend reversal.
Because the run-up in precious metals was so aggressive throughout January, the recent price drop only returned the metals to levels seen just a few weeks prior.
“The debasement trade, which is markets searching for safe havens from debt monetization, has a lot further to run no matter who the next Fed Chair is,” Brooks concluded. Despite the recent price correction, he maintains that “the debasement trade is very much intact.”
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The top U.S. indices closed mixed in the last week, with the S&P 500 index rising 0.23% over the 5 trading days and the Nasdaq Composite, along with the Dow Jones index, falling by 0.29% and 0.50%, respectively.
