Currency policy bets after the "Jackson Hole Meeting": Why did gold and silver surge and then plummet?

At the Jackson Hole meeting, Powell’s dovish stance was like a political bombshell, triggering deep market expectations of a policy shift by the Federal Reserve. In early February, spot gold and silver experienced a rollercoaster—gold fell nearly 10% over ten days, and silver plummeted about 27%. Behind this sharp correction, it wasn’t a breakdown of currency depreciation logic but rather a complex game of market participants interpreting policy signals.

Policy Signal Shift—Powell’s Dovish Tone at Jackson Hole

The Jackson Hole conference is always a key indicator of Fed policy direction. In August 2025, Powell made a crucial decision: prioritizing employment stability over inflation control. This policy tilt, subtle as it seemed, carried profound implications—amid massive public debt and political pressure, the Fed had shifted its priorities.

Before that, the Fed was caught in a dilemma. On one side, the labor market was weak, with rising unemployment pressures; on the other, inflation remained high, well above the 2% target. In 2024, the Fed cut rates by a total of 100 basis points (including a controversial 50 basis point cut before the election), but by 2025, decision-makers quickly adopted a wait-and-see approach. This policy hiatus angered the White House, with Trump’s ongoing pressure on the Fed providing important context for Powell’s speech.

Powell’s speech at Jackson Hole became a market turning point not because of new technical details but because he clearly signaled that even if inflation doesn’t fall significantly, the Fed would resume rate cuts. Once this signal was released, market reactions spread rapidly like dominoes.

The Inevitable Choice Under Debt Dilemma: From Rate Cuts to Currency Depreciation

To understand why Powell’s speech triggered such a reaction, we need to revisit the U.S. macroeconomic fundamentals. U.S. public debt is rising at an alarming rate—not a temporary fiscal deficit but a structural problem. The higher the debt, the greater the pressure on long-term Treasury yields. Higher yields mean higher borrowing costs for the government, which in turn raises financing costs across the economy, threatening economic growth.

In this context, the Fed faces an almost unavoidable political-economics dilemma: either tolerate rising long-term yields (risking recession) or cut rates to lower yields (risking currency depreciation). The Trump administration’s tough stance on interest rates further narrowed the Fed’s options. After the nomination of Kevin Warsh as new Fed chair was announced, markets immediately responded: the 2-year U.S. Treasury yield dropped. This reflected market expectations that Warsh would be more dovish—favoring rate cuts to address debt pressures.

Under these policy constraints, a “currency depreciation trade” emerged. Traders and investors began betting that the Fed would implement quantitative easing and continued rate cuts to achieve a moderate currency depreciation—easing debt burdens without triggering a sharp economic downturn. Gold and silver, as the oldest hedges against currency devaluation, naturally became the main vehicles for this trade.

Market Chain Reaction: Why Warsh’s Appointment Strengthened Rate Cut Expectations

Last Friday (February 2), the sharp decline in gold and silver seemed to suggest the market viewed Warsh as hawkish. But this overlooked deeper market signals. Futures market data provided more credible evidence: after Warsh’s appointment was announced, expectations for future rate cuts actually increased. This seemingly contradictory phenomenon reflects market savvy—though Warsh might be more cautious than Powell in policy style, the political reality remains: Trump’s tough stance on interest rates.

Warsh’s worst nightmare would be following Powell’s path, facing public criticism and political pressure from the president. To avoid this, his best strategy is to push forward with rate cuts before midterm elections. In other words, Warsh’s appointment didn’t change the logic of the currency depreciation trade; instead, it made this logic even more unavoidable through clear political pressure.

The yield curve of the 2-year U.S. Treasury after Warsh’s appointment is the best proof: yields dropped sharply, briefly rebounded due to unexpectedly high producer price data, then resumed declining. The market’s collective judgment is clear: regardless of who is Fed chair, the rate-cutting cycle has become a politically and economically difficult-to-reverse trend.

Data Rebound Reality: The Silver and Gold Plunge Is Just a Correction, Not a Reversal

Spot silver plunged 27% in a single day in early February, and spot gold nearly 10%. These numbers are shocking at first glance, leading many investors to doubt the prospects of currency depreciation trades. But the key is to view these declines over a broader timeframe.

Silver’s 27% drop brought its price back to January 9 levels. In other words, this sharp fall erased the gains of over three weeks. Similarly, gold’s 10% decline returned its price to January 20 levels. Compared to prior gains, this correction is relatively moderate.

More importantly, this correction did not alter the medium-term trend. On daily charts, gold and silver, despite technical adjustments, remain within their long-term upward channels. Historical experience shows that such corrections are normal in an uptrend. After a correction in October, precious metals quickly resumed their upward momentum. Market consensus expects this time to follow a similar trajectory.

The Long-Term Logic Remains Intact: Outlook for Currency Depreciation Trades

From a macro perspective, the three main pillars supporting currency depreciation trades remain solid: First, the rising U.S. public debt is an irreversible trend, ensuring ongoing political pressure on the Fed. Second, regardless of Powell’s signals after Jackson Hole or who is nominated as the new chair, the Fed is already on a rate-cutting path under political constraints. Third, futures markets clearly reflect investor expectations of future rate cuts—this is not short-term sentiment but rational pricing based on fundamentals.

Short-term fluctuations in precious metals reflect traders’ psychological oscillations amid policy signals, but the key drivers of the long-term trend are real debt pressures and policy constraints. Under the policy framework established at Jackson Hole, currency depreciation trades still have a long runway. Gold and silver may face more technical corrections, but as long as the Fed maintains its basic rate-cutting stance, this debt monetization-based trade is far from over.

For investors, the crucial point is to distinguish between short-term volatility and medium-term trends. Jackson Hole has set the policy tone; future variables depend not on whether policy direction changes but on the speed and intensity of implementation. Under this logic, currency depreciation remains the dominant market driver in the medium term.