A key driver of Canada’s outperforming stock market over the past year – gold and silver – slammed into reverse on Friday, dragging the benchmark down nearly 1,100 points in the biggest selloff since last year’s Liberation Day volatility.
The turbulence followed the announcement that U.S. President Donald Trump picked former Federal Reserve governor Kevin Warsh as the next chairman, which eased concerns about inflation and central bank independence.
That may be good news for the U.S. economy over the longer term, but not so good for precious metals that had soared to record highs earlier this month as investors sought popular havens from unpredictable U.S. policies.
Now, these gains are unwinding in a big way.
The price of gold fell as low as US$4,700 an ounce, down more than US$650, at its lowest point during the day. That put it well under the US$5,000 threshold that had been heralded as an indicator of rising investor queasiness over U.S. economic and geopolitical policies as recently as this week.
Silver, which had also been on a tear as a safe haven asset with industrial applications, fell 28 per cent.
The S&P/TSX Composite Index, which has a large exposure to global precious metals producers, closed at 31,923.52, down 1,092.61 points or 3.3 per cent, ending its longest monthly winning streak since 2017.
Barrick Mining Corp. and Agnico Eagle Mines Ltd., two of the biggest gold producers, fell more than 10 per cent each, challenging a bull market run that had doubled the price of some companies in the sector over the past 12 months.
Other commodity producers were hit as well, suggesting a full-on retreat from stocks that had served investors well in recent months: uranium producer Cameco Corp. fell 6.6 per cent, copper producer Lundin Mining Corp. fell 7.6 per cent and the energy sector fell 1 per cent.
Market volatility wasn’t confined to Canada, though.
In the U.S. the broad S&P 500 fell 0.4 per cent, with the technology sector and materials suffering some of the biggest declines.
The 30-stock Dow Jones Industrial Average was down as much as 600 points earlier in the day, before regaining some lost ground in the afternoon.
While head-spinning U.S. tariffs and Mr. Trump’s designs on Greenland may have rattled the stock market this month and near the start of Mr. Trump’s second term in office, this dip appeared related to a presidential move that was widely applauded – simply because it resets expectations monetary policy as the year grinds on.
Who is Trump’s Federal Reserve chair nominee Kevin Warsh?
Mr. Trump named Mr. Warsh as his choice to lead the Federal Reserve when Jerome Powell’s term ends in May. The announcement eased some concerns that the next Fed chairman would simply follow the President’s demands to cut interest rates.
“The perception seems to be that Warsh is not someone who is firmly in the president’s pocket and that he won’t contribute to a further undermining of the Fed’s independence and fears of currency debasement,” John Higgins, chief markets economist at Capital Economics, said in a note.
Prime Minister Mark Carney, a former central banker in Canada and the U.K., called Mr. Warsh a “fantastic choice” for Fed chair.
But Mr. Warsh’s hawkish track record for keeping a close eye on inflation could add a headwind to stock valuations that can benefit from rate cuts. At the same time, his stance could add support to the U.S. dollar.
Kevin Warsh in New York in 2017.Brendan McDermid/Reuters
The dollar slid to multiyear lows this week on fears that Mr. Trump was in favour of a weaker currency to spur exports, but rebounded slightly on Friday.
Some observers are not so sure that Friday’s turbulence marks a definitive shift in investor preferences, though.
For one thing, Mr. Warsh’s independence from the White House remains an open question, which adds uncertainty to whether the next Fed chairman will indeed take a tough stance on interest rates when Mr. Trump is demanding cuts.
“Following a year-long pressure campaign on the Fed to reduce interest rates, there can be no doubt of the incoming Chair’s leanings,” Doug Porter, chief economist at BMO Nesbitt Burns, said in a note.
As for gold, geopolitical and economic risks weren’t the only drivers.
Many central banks have been buying gold for more than a decade as they diversify their reserves beyond the U.S. dollar, adding a significant source of demand that is showing no signs of fading.
“If a central bank decides they want to pivot away from the dollar and own more gold, that is going to move the price quite violently. Which is what we’re observing,” Anshul Sehgal, global co-head of fixed income, currency and commodities at Goldman Sachs, said on a podcast.