Last week, we left off with the nomination of the next Fed chair, which caused chaos. Let’s call it what it was.
With markets reopening on Monday, we had a feeling things weren’t about to calm down.
And sure enough, they didn’t...
How could one announcement have such a big impact?
The Fed’s monetary policy influences the global economy more than any other factor.
When it turns restrictive (meaning the easy money stops flowing), the dollar tends to strengthen.
And historically, a strong dollar pushes precious metal prices down.
So investors started selling heavily to lock in profits, especially with gold and silver at all-time highs.
Nothing unusual so far.
The real problem was that a lot of investors were using leverage.
When prices fall, those positions get liquidated, triggering even more selling, most of it forced.
That pushes prices down further, and the spiral feeds on itself.
The result: extreme volatility and drops of more than 20% in a single day, even in assets usually considered relatively low risk.
Crypto, which is riskier still, took the biggest hit.
Bitcoin fell 30% over the week, from $85,000 to $60,000. And it’s probably best if I don’t mention the other coins.
More than a billion dollars in leveraged positions were liquidated in 24 hours.
Are things settling down?
The sell-off eased towards the end of the week, and investors started buying again.
We’ll have to see whether that stability lasts, or whether this was just a technical bounce before another leg down.
P.S. I go into more detail on the technical side in the video below, particularly on gold and the S&P: