Precious Metals Surge as Dollar Weakens Amid Policy Uncertainty

The precious metals market staged a strong rebound on Tuesday, with gold and silver prices climbing sharply as the U.S. dollar retreated across multiple fronts. April COMEX gold jumped +282.40 points (+6.07%), while March COMEX silver surged +6.292 (+8.17%), recovering significant ground lost over the previous two trading sessions. This rally in precious metals stands in stark contrast to the dollar index’s decline of -0.21%, reflecting a broader market shift toward asset diversification amid economic and geopolitical uncertainties.

Why the Dollar Lost Ground

The greenback faced headwinds from multiple directions on Tuesday. A notable driver was the strength in the Chinese yuan, which rallied to a 2.5-year high against the dollar. This Asian currency momentum underscored growing capital flows away from U.S. assets. Meanwhile, yield dynamics shifted against the dollar when Treasury note yields—which had risen early in the session—turned lower, eroding the currency’s interest rate advantage relative to competitors.

The dollar’s weakness gained momentum as stock markets sold off, triggering increased demand for the currency as a safe haven. However, this support proved temporary as other factors reasserted dominance. Richmond Federal Reserve President Tom Barkin offered mixed signals, suggesting the U.S. economic outlook is improving as uncertainty fades, though he acknowledged inflation remains above the Fed’s 2% target and hiring is concentrated in a limited number of sectors. His comments provided modest support to the dollar despite broader weakness.

Adding another layer of complexity, the partial U.S. government shutdown, now in its fourth day, weighed on the currency. While a spending bill was expected to advance a vote in the House later Tuesday, uncertainty surrounding fiscal stability continued to pressure the greenback. Additionally, the dollar remains under pressure from capital outflows as foreign investors reassess their U.S. holdings amid concerns about the growing federal deficit and political fragmentation.

President Trump’s recent comments expressing comfort with dollar weakness have also undermined the currency’s appeal. The nomination of Keven Warsh as the next Federal Reserve Chair—viewed as more hawkish than alternative candidates—had provided temporary support last week, but momentum from that development has begun to fade.

The Precious Metals Advantage

The weakness in the dollar created an ideal environment for precious metals to flourish. Commodities priced in dollars typically gain attractiveness when the greenback declines, as they become more affordable for international buyers. Beyond this mechanical advantage, precious metals are capturing investment interest due to rising demand for safe-haven assets.

Geopolitical tensions remain elevated, with ongoing concerns about U.S. tariff policies and instability in Iran, Ukraine, the Middle East, and Venezuela. This uncertainty is prompting investors to shift capital toward tangible assets perceived as stores of value. The “dollar debasement trade”—a strategy predicated on the U.S. currency losing purchasing power amid fiscal deficits and monetary expansion—has gained traction, further benefiting precious metals as investors hedge against currency depreciation.

U.S. political uncertainty, combined with substantial government deficits and questions about fiscal policy direction, is convincing investors to reduce dollar-denominated holdings. Precious metals offer an alternative that has historically protected purchasing power during inflationary periods and political transitions. The partial government shutdown, though expected to be resolved quickly, reinforces concerns about U.S. governance and fiscal management.

Recent liquidity injections into the financial system are also supporting precious metals demand. The Federal Reserve’s December announcement of a $40 billion monthly liquidity program has eased financial conditions and encouraged asset diversification, including allocation to precious metals. This monetary accommodation contrasts with expectations that the Fed will cut rates by approximately 50 basis points during 2026, while the Bank of Japan is anticipated to raise rates by 25 basis points and the European Central Bank is expected to maintain current levels.

Central Banks and Funds Drive Precious Metals Higher

Strong institutional demand provides a crucial underpinning for precious metals prices. The People’s Bank of China (PBOC) has been consistently accumulating gold reserves, with holdings rising by 30,000 troy ounces to 74.15 million ounces in December alone—marking the fourteenth consecutive month of increases. This sustained buying signals confidence in precious metals as a portfolio diversifier and insurance against currency risks.

Global central bank activity extends beyond China. The World Gold Council reported that central banks worldwide purchased 220 metric tons of gold during the third quarter, representing a +28% increase from the second quarter. This accelerating pace of official-sector accumulation has helped underpin prices and suggests monetary authorities view precious metals as essential reserves.

Investment fund activity has added additional momentum. Long holdings in gold exchange-traded funds climbed to a 3.5-year high last Wednesday, indicating retail and institutional investors are building positions. Silver ETF holdings similarly reached a 3.5-year peak on December 23, though subsequent liquidations—particularly following Keven Warsh’s Fed Chair nomination last Friday—reduced those holdings to a 2.5-month low on Monday. The sharp, near-term volatility in silver fund positions reflects sensitivity to monetary policy signals.

Market Expectations and Outlook

Looking ahead, markets are pricing a 9% probability of a -25 basis point rate cut at the next Fed policy meeting scheduled for March 17-18. For the Bank of Japan, expectations of tightening appear extremely limited, with markets assigning 0% odds to a rate hike at the March 19 policy meeting. The European Central Bank faces dovish pressure following weaker-than-expected inflation data from France, where January harmonized CPI fell -0.4% month-over-month and rose +0.2% year-over-year, falling short of expectations.

These divergent monetary policy trajectories reinforce the case for precious metals. The prospect of a lower-rate environment in the U.S., combined with potential tightening elsewhere, supports demand for alternative assets. Currency specialists monitoring EUR/USD saw the pair rise +0.20% on Tuesday, while USD/JPY increased +0.10%, reflecting modest shifts in the currency markets as precious metals gain investor interest as hedges against financial uncertainty.