Cover Story: Precious Metal Volatility Puts the ‘Safe Haven’ Trade on Trial

1. The recent months have seen extreme volatility in precious metals, particularly gold and silver, shaking both speculators and industries and prompting a fresh review of gold's reputation as a safe-haven asset in the global financial system. One Chinese mutual fund manager metaphorically described this period as a cycle of "killing the shorts, then the longs, then the shorts again," capturing the violent swings and uncertainty that gripped the markets. [para. 1][para. 2]

2. The roller-coaster began with a spectacular rally at the start of 2026: spot gold surged to highs of around $5,600 per ounce (up 30% from the start of January), and silver reached $120 per ounce (up 67%). However, this rally unraveled by month's end, with Jan. 30 marking gold and silver's worst one-day drop in 40 years. By February 6, gold settled around $4,867 and silver at $73. The spike in volatility pushed the CBOE Gold ETF Volatility Index above 44%, a level last seen during the 2008 financial crisis and the early COVID-19 market panic in 2020. [para. 3][para. 4]

3. This turmoil did not remain confined to precious metals; it sparked a cross-asset chain reaction, disturbing commodities, stock markets, and cryptocurrencies, and raising deep questions about whether gold should still be considered a safe haven or a speculative asset. Despite the chaos, some investors remain committed to gold in the long term, citing de-dollarization and geopolitical uncertainty, but the crisis has served as a warning against excessive leveraged speculation that distorts fundamentals. [para. 5][para. 6]

4. The origins of the early-year boom lay in speculative fervor, with traders describing a palpable sense of euphoria. Lu Ting, Nomura's chief China economist, said the surge was largely driven by sentiment rather than actual fundamentals. Key policy moves by U.S. President Donald Trump—such as a surprise military raid in Venezuela, a criminal probe into Fed Chair Jerome Powell, and tariff threats—heightened uncertainty. This fueled not only the gold rally but also big gains in copper, aluminum, and platinum futures. To cool speculation, major exchanges in China and the U.S. imposed stricter controls, including margin hikes and market-cooling notices. [para. 7][para. 8][para. 9][para. 10][para. 11][para. 12][para. 13][para. 14]

5. The bubble burst on Jan. 31 after Trump nominated Kevin Warsh, known for his hawkish monetary views, as the next Fed chair. The collapse was characterized by rapid profit-taking and unwinding of leveraged positions. Western financial flows, magnified by options activity on the SPDR Gold Shares ETF, played a significant role in driving the swings. [para. 15][para. 16][para. 17]

6. The episode resulted in huge losses for many investors, with some accounts wiped out. Retail gold buying and selling activity in China spiked amid the turmoil. Experts now advise retail investors to hold gold for the long term, avoid leverage, and keep gold as a measured portfolio hedge. Chinese silver ETFs suffered particularly harsh losses; for example, the UBS SDIC Silver Futures Fund dropped 31.5% in a day after aligning with overseas market falls. [para. 18][para. 19][para. 20][para. 21]

7. Despite brutal deleveraging, analysts note that gold's long-term prospects remain strong, especially as global economic disorder grows and trust in the dollar and U.S. Treasurys wanes. The value of all existing gold nearly matched U.S. Treasury debt—$38.2 trillion vs. $38.5 trillion—suggesting cracks in the post-Bretton Woods, dollar-anchored order. Central banks have doubled their gold purchases since 2022, positioning gold more as a trusted reserve asset or "currency." Crypto firms like Tether have also become significant gold buyers. [para. 22][para. 23][para. 24][para. 25][para. 26]

8. The sharp rise in precious metals, especially silver, has put significant pressure on downstream industries like solar panel and EV battery producers, especially in China, where 90% of silver consumption is industrial. The cost of silver inputs surged 77% for solar manufacturers over two months, forcing production halts and shifts toward copper and alternative technologies, though this is complicated by concurrent price rises in copper and aluminum. [para. 27][para. 28][para. 29][para. 30][para. 31]

9. Higher metals prices could boost Chinese producer inflation, offering some relief from deflationary pressures, but weak consumer demand limits any rise in consumer inflation. Thus, companies are more likely to absorb cost pressures internally, risking margins and potentially reducing wages and spending, with broader implications for China's post-pandemic economic trajectory. [para. 32][para. 33]