Happy Thursday, GoldBuzzers!

Gold and silver were doing just fine yesterday afternoon. Then Kevin Warsh showed up - running his first meeting as Fed chair. He held rates steady, and gold dropped to a 2 percent loss inside the hour. That was the reaction I’d expected but let’s dig into what it really means.

Let’s get into it. ⬇️

Gold ended Wednesday near $4,268 an ounce, giving back a five-day rally that had carried it close to $4,350, after the Federal Reserve held rates at 3.5 to 3.75 percent and pointed to a possible hike later this year. The rate cut members had penciled in back in March was scrapped, with nine of 18 now expecting at least one increase and the median year-end projection rising to 3.8 percent.

Treasury yields climbed on the shift, raising the cost of holding metal that pays no interest. Safe-haven demand cooled as well, with the US and Iran set to sign a deal Friday to reopen the Strait of Hormuz and restart oil flows.

Silver followed gold down and slipped back to $68 an ounce, with new Fed chair Kevin Warsh adding to the pressure on bonds and metals by announcing task forces to review how the Fed operates and reiterating his preference for a smaller balance sheet.

Kevin Warsh held his first meeting as Fed chair on Wednesday, and he used it to tell markets they are on their own. Rates stayed in the 3.5 to 3.75 percent range, where they have sat since December. That part was expected. The rest was not.

Warsh stripped the usual guidance out of the statement. He dropped the forward hints markets had leaned on, declined to submit his own forecast for the dot plot, and said he would set up task forces to review how the Fed communicates. Nine of his colleagues now project a rate hike before year-end. His message on inflation was blunt. He said the Fed had missed for five years and would fix it.

The reaction was fast. The Dow fell 0.98 percent, the S&P 500 fell 1.21 percent, and the Nasdaq fell 1.34 percent. Two-year Treasury yields jumped 16 basis points to their highest level in more than a year. The dollar rose about 1 percent, its best day in almost a year. Gold gave back its gains and dropped more than 2 percent. Silver fell further, the way it usually does when gold moves.

On the surface this reads as a clean hawkish response, and in the short run it is. Higher real yields and a firmer dollar weigh on metals that pay no interest. The sell-the-news move was ordinary.

The change underneath the price action is the part worth keeping in view. Under Jerome Powell, the Fed told markets where it was heading well in advance. That predictability worked like insurance. Warsh has removed it. By refusing to signal his next move and scaling back the forward-looking tools, he has raised the level of uncertainty on purpose. Markets dislike uncertainty. Gold has a long record of doing well in it.

Warsh also made clear the Fed will stay restrictive while inflation runs hot. May's reading came in at 4.2 percent, the highest in three years, pushed up by energy costs. In a world where policy is harder to read and the Fed is willing to hold the line, gold's role as a hedge against both inflation and policy mistakes gets more valuable. Silver tends to magnify those moves, helped by industrial demand and its higher sensitivity to gold.

None of this makes metals immune to more near-term pressure. Higher-for-longer yields and a stronger dollar can keep a lid on prices for a while. But the way the Fed signals its intentions has changed, and that changes the risk and reward from here.

Investors who hold gold and silver as a hedge against uncertainty, rather than a bet on the next rate cut, have reason to read Wednesday's weakness differently than the headline number suggests. The Warsh era is only days old. So far its defining feature is the removal of the Fed's guiding hand.

That’s all for this Thursday, folks. See you on Sunday.

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Rick Adams
Founder, GoldBuzz
rick@goldbuzz.com