Over the last week, the precious metals market went through a meat grinder. Gold and silver went from moon shot to abrupt crash and back to liftoff in the span of about a week. It’s been a classic case of market psychology, leverage, and the sheer chaos that happens when Washington throws a spitball at Wall Street.
Several distinct features come to mind. The “Warsh Shock and Flaw”, for example, and why the inflation hawk narrative you’re hearing on the news is likely wrong.
To understand where we are, we have to look at how we started 2026. Quite frankly, January was insane. Gold wasn’t just rising. It was skyrocketing. By January 29, gold hit a staggering all-time high of $5,608 per ounce. Silver was even crazier, breaching $120 per ounce; up nearly 70 percent in a single month.
But, as anyone who’s followed markets for a cycle or two knows, prices cannot go vertically for long. A rapidly rising market will soon outpace the underlying economic reality. A peak is reached where the cost of assets exceeds the available pool of capital and the actual productivity of the economy.
When prices decouple from fundamental value, the system naturally resets through gravity-defying margin calls and exhaustion. There are simply no buyers left willing or able to chase the next leg up.
On January 30, the trapdoor opened. In a single day, silver delivered a brutal 27 percent plunge. This marked its worst one-day rout in history, even beating the infamous Hunt Brothers crash of 1980. Gold followed suit, dropping nearly 12 percent. By the time the dust settled, trillions in paper wealth had evaporated.
Then, just as headlines were declaring the gold bull market over, the first week of February brought the bounce. Gold has pushed back up around $5,000, and silver is fighting to stay above $80.
Who’s Pulling the Strings?
This wasn’t just a simple case of mom and pop selling their dusty jewelry and sterling silverware for extra cash. This was a violent, systemic liquidity event.
When prices started to dip, the CME Group – the massive exchange that dictates the rules – abruptly hiked margin requirements. This aggressive move forced anyone trading on borrowed money to either instantly come up with significantly more cash or liquidate their positions immediately.
Most chose – or were forcefully liquidated – to sell. This created a terrifying price vacuum where there were simply no buyers left to catch the falling knife.
In addition, for months, as a core part of the popular debasement trade, sophisticated big funds had been betting heavily that the U.S. dollar was finally going to collapse under its own weight. When a certain Fed nomination suddenly suggested the dollar might stay strong, these massive institutional whales all tried to exit the same narrow door at the same time, causing a chaotic bottleneck.
In this regard, the primary catalyst for this total chaos was President Trump’s nomination of Kevin Warsh to succeed Jerome Powell as Fed Chair. Because Warsh was such a vocal, public critic of printing money via Quantitative Easing back in 2008 and 2011, the global market instantly labeled him a hardline inflation hawk.
The logic was simple: Warsh hates inflation. Warsh will protect the dollar. Warsh will keep rates higher for longer. Therefore, gold, which pays no interest or yield, is now perceived as a bad investment.
That reasoning sent the U.S. Dollar Index (DXY) above 97 and sent precious metals into a disastrous tailspin. But here’s the thing, the broader market is very likely misreading the modern Kevin Warsh.
Warsh Shock and Flaw
If you dig into Warsh’s recent writings, specifically his 2025 op-eds, he isn’t a traditional, one-dimensional hawk who wants to crush the economy with high rates. Rather, he believes that through higher productivity gains from the ongoing AI revolution, the economy can comfortably handle significantly lower rates without triggering high inflation.
Warsh has argued that the current AI boom and massive productivity gains mean the entire economy can handle lower interest rates without sparking a 1970s-style inflation spiral. He isn’t looking to stay artificially restrictive for the sake of it. Instead, he’s looking to get the Fed out of the way of American business. Per Warsh:
“AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness. Productivity improvements should drive significant increases in real take-home wages. A 1-percentage-point increase in annual productivity growth would double standards of living within a single generation.”
In short, Warsh doesn’t necessarily want punishingly high interest rates. He wants a leaner, smaller Fed balance sheet. By this, he means he wants the Fed to stop buying Treasuries and mortgage-backed securities, allowing the private market to determine the true price of capital again.
Under the Warsh Shock and Flaw, he may actually cut rates much faster than Jerome Powell ever would have, so long as he can successfully shrink the Fed’s massive footprint at the same time.
Last week’s frantic precious metals wash out happened because panicked traders saw the Kevin Warsh of 2008, not the 2026 version who is closely aligned with the Trump administration’s aggressive pro-growth, pro-technology agenda.
What to make of it?
How to Trade the Warsh Doctrine
So, if the hawk label is a misreading of the modern Kevin Warsh, what does the future actually look like?
If we step away from the panic of late January, and apply a little abstract thinking, a picture emerges where the Warsh Doctrine could paradoxically fuel the next major rally in silver.
Warsh’s core thesis is built on the simple idea of AI-driven productivity. Most Fed chairs are obsessed with the long obsolete Phillips Curve, the theory that low unemployment must lead to high inflation. Warsh thinks that’s outdated. He argues that if AI makes workers and companies more efficient, the economy can grow at 3 percent or 4 percent without prices spiraling.
This gives him the cover to ‘run it hot’ with lower interest rates. For a metal like silver, which is both a monetary hedge and an industrial metal, this is a dream scenario. You get the benefit of lower rates (which makes non-yielding silver more attractive) combined with a high-growth industrial environment where silver is needed for everything from AI chips to solar panels and battery energy storage systems.
The real risk, and the potential flaw, in the Warsh Doctrine is his focus on shrinking the Fed’s balance sheet. He wants the Fed out of the bond-buying business. While he might cut short-term rates to help the consumer, his refusal to buy long-term Treasuries could cause long-term yields to stay high.
This would create a steepening of the yield curve. Historically, when the curve steepens and the Fed is actively shrinking its footprint, it puts immense pressure on the traditional banking system. If the banks start to creak under the weight of holding all those government bonds without Fed help, investors will run right back to the safety of hard assets – like gold and silver.
The January crash was a necessary and well overdue market cleansing. The gold and silver market had become a meme trade, driven by a zealot belief that the dollar was imminently doomed.
Now that the Johnny-come-latelies are out. What’s left are the cool heads and strong hands who understand that a productivity-focused Fed is actually the perfect setup for a sustainable, long-term bull market in real assets.
The January selloff wasn’t the end of the story. It was the resetting of the gold and silver market from a runaway speculative bubble to a fundamental bull market run.
Trade it accordingly.
[Editor’s note: The Warsh Shock just wiped-out trillions in gold and silver value, but the headlines might be dead wrong. While the herd screams inflation hawk, a deeper look at his 2025 writings reveals a different playbook: an AI-driven productivity boom that could actually lead to lower rates and a massive second leg for hard assets. >> Don’t trade the 2008 version of Kevin Warsh. Trade the 2026 reality.]
Sincerely,
MN Gordon
for Economic Prism
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