A bit too precious?

Precious metals’ surge was partly driven by the softer dollar, stubborn US inflation and hopes of fresh fiscal support. These factors haven’t gone away, despite the sudden correction over the last few days, suggesting the sell-off from a ‘crowded trade’ may tell us more about market structure and liquidity than the underlying macro story.

02 February 2026

By the 28 January this year, silver was up over 300% since the end of 2024 and gold up well over 100%*. After a brutal sell-off last week, they are now up ‘just’ 184% and 80% respectively. How did we get here?

The main theory doing the rounds on trading floors to explain the upward moves is the ‘debasement trade’, which is really a shorthand for investors positioning themselves for a broad US decline. Debasement can supposedly be seen in inflation that just doesn’t go away (US headline Consumer Price Index (CPI) inflation remains above the 2% Federal Reserve’s (Fed) target) and a huge government deficit remains, with both manifesting themselves in a weaker US dollar. The weaker US dollar is mechanically beneficial for gold since the metal itself is denominated in US dollars. The inflation point is a particularly powerful one and it’s coming from a couple of places. First, stimulus from the Trump administration’s tax cuts to the tune of tens of billions of dollars is set to kick in this year, which will boost the economy even as inflation remains warm. While Fed Chair nominee Kevin Warsh is not seen as a big rate cutter neither is he likely to go after inflation with all guns blazing. He is the President’s nominee after all. The other source of inflation could be global. While the Organisation for Economic Co-operation and Development’s (OECD’s) December outlook sensibly warned of elevated risks, stimulus is also expected in Japan, Germany, possibly China and then – in the event of peace in Ukraine – even Russia too.

Finding the limits of a crowded trade

What then explains the sell-off? It’s not like any of the factors described suddenly disappeared late last week. This could just be a classic case of froth, with buying in recent months characterised by retail-focused ETFs replicating or physically holding gold and silver. But at some point extended rallies inevitably become subject to profit-taking. This time, retail investors may have sold into a market that has lost one of its main natural buyers, since the World Gold Council reported that many central banks started to pare back holdings amid concerns of overvaluation last year. With (many) more sellers than buyers, it looks like gold hit a classic air pocket with traditionally more volatile – and certainly even frothier – silver following suit.

Gold versus ‘BlipCoin’ as effective diversifiers

But spare a thought for Bitcoin, which never enjoyed anything like the rally seen by the precious metals. Down -17% from the end of 2024*, its underperformance is all the more mysterious given its supposed appeal as an alternative to the US financial system. Quantum vulnerability is one plausible explanation, the idea that as quantum computing gets more and more powerful, digital wallets holding cryptocurrencies are becoming more vulnerable to theft and fraud. Gold may have suffered a hiccup in recent days but its millennia-old status as a diversifier is unlikely to be superseded anytime soon.

Air pocket – gold’s drop into an illiquid market was replicated (and more) by silver:

From 31 Dec 2024 to 2 Feb 2026