Theme and Background
This chapter focuses on the violent volatility in the precious metals market in February 2026 and its underlying drivers. The report argues that market volatility is not a bearish signal but rather the market adapting to a new monetary regime shaped by sustained central bank liquidity support and geopolitical fragmentation. The Federal Reserve faces structural constraints, making a sustained reduction in balance sheet liquidity increasingly unlikely.
Core Thesis
The author's core investment thesis is: Gold's long-term fundamentals remain robust, and the current price volatility is a normal process of the market adapting to a new monetary regime, not a trend reversal. Counterintuitive judgments include:
- The flash crash on January 30 was not due to fundamental deterioration but a mechanical reversal and forced liquidation of leveraged momentum trades.
- Even under a new chair, the Federal Reserve cannot materially shrink its balance sheet; instead, it will continue to inject liquidity through "QE-like" operations.
- The sharp internal divergence beneath the surface stability of the stock market (AI-related balance sheet pressures, collapse of sector correlations) is driving capital flows from financial/digital assets to hard assets.
Key Arguments and Data
1. Gold Price Performance
- Spot gold closed February at $5,279.73/oz, up $384.70 (+7.86%) month-over-month, marking the highest month-end closing price ever and the first time above $5,000.
- It is only $138.28 (2.55%) away from its all-time high closing price.
- Since late 2023 (around $2,000), gold has experienced only right-tail price shocks (upside shocks). The author believes it is normal to see more balanced left- and right-tail events in the future.
2. Internal Market Pressures
- The S&P 500 index fell only 0.87% in February, but experienced violent internal rotation: AI-related balance sheet pressures triggered a sell-off in software/SaaS stocks, with panic spreading from equities to credit and private markets.
- Hyperscale tech companies issued record amounts of investment-grade bonds for AI infrastructure, leading to increased corporate borrowing, wider credit spreads, and reduced stock buyback capacity.
- Individual stock return dispersion rose to levels typical of market dislocation periods, single-stock volatility surged, and leverage remained elevated.
3. Federal Reserve Policy Shift
- The Fed has quietly resumed balance sheet expansion ("QE-like"), purchasing hundreds of billions of dollars in short-term Treasuries monthly while allowing MBS to continue rolling off.
- Although the scale is far smaller than historical levels (hundreds of billions per month vs. trillions), it is functionally still money printing: increasing reserves, tightening safe collateral, and marginally easing liquidity conditions.
- New Chair Kevin Warsh opposes large-scale QE, but is constrained by the FOMC structure, post-GFC market regulations, and Treasury financing needs, preventing a material balance sheet contraction.
4. Comparative Data Table
| Indicator |
2/28/26 |
1/31/26 |
Monthly Change |
Monthly % Change |
YTD % Change |
| Spot Gold |
$5,278.93 |
$4,894.23 |
+$384.70 |
+7.86% |
+22.22% |
| Spot Silver |
$93.79 |
$85.20 |
+$8.59 |
+10.08% |
+30.87% |
| NYSE Arca Gold Miners (GDM) |
3,299.41 |
2,743.86 |
+555.55 |
+20.25% |
+35.06% |
| S&P 500 Index |
6,878.88 |
6,939.03 |
-60.15 |
-0.87% |
+0.49% |
| US 10-Year Treasury Yield |
3.94% |
4.24% |
-30 BPS |
- |
-23 BPS |
| Gold ETF Holdings (Million oz) |
100.92 |
100.54 |
+0.38 |
+0.38% |
+1.99% |
| Silver ETF Holdings (Million oz) |
834.04 |
823.76 |
+10.27 |
+1.25% |
-3.43% |
Companies/Assets Involved
- Gold: Bullish. The report believes gold's long-term structural uptrend remains intact, with central bank liquidity support and a fiscal dominance environment as core drivers.
- Silver: Bullish. February's gain (+10.08%) outpaced gold, with ETFs continuing to buy during pullbacks.
- Gold Mining Stocks (NYSE Arca Gold Miners Index): Strongly bullish. Up 20.25% for the month, hitting a new all-time high and significantly outperforming gold itself.
- S&P 500 Index: Neutral to bearish. Surface stability masks significant internal pressures; AI-related balance sheet risks could trigger a broader market correction.
- US Treasuries: Bullish (on price). The 10-year yield plunged from 4.24% to 3.94%, reflecting safety/growth concerns.
- US Dollar Index (DXY): Bearish. Closed at 97.61, persistently weak, displaying a pattern of "lower highs, lower lows."
Investment Implications
- Increase allocation to gold and gold mining stocks: Against the backdrop of sustained Fed "QE-like" operations, intensifying fiscal dominance, and rising internal pressures in the stock market, gold's strategic value as a hard asset is enhanced. The high-beta nature of mining stocks offers greater elasticity during gold's uptrend.
- Be wary of tech stocks and private credit risks: Balance sheet pressures from AI-related capital expenditures, widening credit spreads, and declining buyback capacity could trigger broader market deleveraging. The report suggests capital is rotating from financial/digital assets to physical assets.
- Monitor the Fed's policy path: Even with a new chair, structural constraints mean the Fed cannot return to a "scarce reserves" regime. An environment of flexible rates but an expanding balance sheet has historically been favorable for gold.
Theme and Background
This chapter discusses the structural floor of the Federal Reserve's balance sheet and the profound impact of China's monetary policy on gold. The report argues that the expansion of the Fed's balance sheet has shifted from an "emergency tool" to a "structural input," while China is managing domestic debt and financial stability through gold reserve accumulation and the real depreciation of the renminbi. Together, these two factors provide long-term support for gold.
Core Views
- The Fed's balance sheet will be structurally biased toward growth: Even amid hawkish rhetoric, reserves have become a structural requirement for maintaining market stability, not a temporary buffer. The future is neither true tightening nor clear easing, but "managing liquidity rather than withdrawing it."
- China is achieving "implicit real depreciation" through gold: Rather than a sharp nominal exchange rate depreciation, China is allowing a gradual real weakening of the renminbi via gold reserve accumulation and domestic asset price adjustments to reduce the debt burden.
- Gold's long-term drivers (fiscal dominance, de-dollarization, depressed real returns) remain solid: Short-term volatility does not alter the structural trend.
Key Arguments and Data
1. Structural Support from the Fed's Balance Sheet
- The repo rate has persistently exceeded the interest rate on reserves, indicating reserve scarcity; increased usage of the standing repo facility shows uneven liquidity distribution.
- The Fed's response (pre-funding reserves) stabilized markets without formally implementing QE, revealing a key point: reserves are now a "structural input" rather than an "excess buffer."
- In a steady state, the Fed's balance sheet will grow in line with nominal GDP, bank deposits, and regulatory requirements. Modest reductions are feasible, but pushing reserves below the "ample" threshold would trigger new funding pressures.
- The report concludes: The Fed's balance sheet will be structurally biased toward growth, even with hawkish rhetoric. Gold does not need aggressive QE to perform; it benefits from the recognition that "lasting monetary constraints are structurally unattainable."
2. China's Monetary Policy: Implicit Depreciation
- China faces a prolonged real estate downturn, high domestic debt, and constrained policy options. Traditional reflation tools (large-scale fiscal stimulus or aggressive monetary easing) could accelerate capital outflows and undermine renminbi confidence.
- Chinese authorities choose to allow a gradual real adjustment in the value of domestic assets and liabilities while maintaining nominal exchange rate stability. This prioritizes "stability" over "speed."
- Gold's role in China's framework:
- No counterparty risk, cannot be frozen or sanctioned
- Under capital controls, gold is one of the few credible stores of value for households and institutions
- Accumulating gold while maintaining capital controls enhances financial resilience without triggering speculative pressure on the renminbi
Key Data (Table)
| Indicator |
Value |
Time Period |
| Renminbi-denominated gold price increase |
+187.87% |
Dec 30, 2022 – Mar 4, 2026 |
| Renminbi-denominated gold CAGR |
39.67% |
Same as above |
3. Three Structural Drivers of Gold
| Driver |
Core Logic |
| Persistence of fiscal dominance |
High government debt, structurally entrenched deficits, and extremely low political tolerance for austerity. Central bank signals may indicate discipline, but sovereign financing needs and market fragility limit execution capacity. |
| Global reserve de-dollarization |
Not an abrupt abandonment of the dollar, but a gradual rebalancing driven by geopolitics, sanctions risk, and currency sovereignty needs. Gold is unique due to its neutrality, liquidity, and lack of counterparty risk. |
| Suppressed real returns on cash and sovereign bonds |
Even with rising nominal yields, inflation, regulatory constraints, and policy interventions limit real purchasing power growth. This encourages reallocation toward long-term stores of value. |
Companies/Assets Involved
- Gold (spot): Core subject of analysis. The report views its long-term fundamentals as strong, with short-term volatility driven by positioning, interest rates, and dollar adjustments.
- Renminbi (CNY): China achieves "real depreciation" through gold accumulation and capital controls, not nominal depreciation. The renminbi-denominated gold price has risen 187.87% since end-2022.
- Federal Reserve Balance Sheet: Seen as an indirect driver for gold. Structural growth in reserves undermines confidence in fiat currency discipline and compresses real yields.
Investment Implications
- Long gold: The report explicitly believes that the structural expansion of the Fed's balance sheet and China's strategic (non-speculative) demand for gold will continue to support gold prices. Investors should focus on gold's allocation value as a "structural monetary asset," rather than short-term policy volatility.
- Beware of long-term compression in real returns on dollar assets: Against the backdrop of fiscal dominance and de-dollarization, the real purchasing power growth of cash and sovereign bonds is limited, making gold a rational long-term portfolio component.
- Monitor the path of renminbi real depreciation: China's gradual adjustment through gold accumulation and capital controls provides structural demand for gold from the world's second-largest economy, which is price-insensitive. Investors should view this as a long-term trend rather than a short-term trading opportunity.
Theme and Background
This chapter focuses on the relationship between short-term price fluctuations and long-term fundamentals in the precious metals market, particularly silver. The report argues that the recent sharp volatility in gold and silver prices is not due to deteriorating fundamentals but rather the result of market structure (especially the options market) and position adjustments. The market is digesting higher price levels, not undergoing a trend reversal.
Core Views
- Short-term volatility is a market characteristic, not a fundamental signal: Gold prices do not rise in a straight line. Pullbacks triggered by changes in interest rate expectations, a stronger US dollar, or speculative position adjustments are normal and do not alter the long-term bullish thesis.
- Silver's volatility stems more from options market structure: A large volume of outstanding call options on the SLV ETF forces market makers to engage in dynamic hedging, creating a price feedback loop that results in strong path dependency and sharp short-term price swings.
- Long positions are shifting from the futures market to the options market: This reflects that investors remain confident in the direction but are uncertain about short-term timing, thus choosing to express bullish exposure through options to limit balance sheet risk.
Key Arguments and Data
1. Silver Price Performance: Spot silver closed February at $93.79, a record monthly closing high and the first monthly close above $90. However, its trading range was wider and its volatility greater than that of gold.
2. Position Structure Divergence (Figure 5 data):
- CFTC silver non-commercial long positions (futures market) have declined significantly since mid-2025.
- iShares Silver Trust (SLV) call option open interest has surged to an all-time high.
- The report converts both into nominal silver ounces for comparison, showing a massive migration of long exposure from futures to options.
| Position Type |
Trend |
Implication |
| CFTC Silver Non-Commercial Longs (Futures) |
Declining significantly since mid-2025 |
Reduction in speculative directional long positions |
| SLV Call Option Open Interest |
Surging to all-time highs |
Investors expressing bullish views via options rather than buying futures directly |
3. Mechanism of Options Market Impact on Prices:
- A large volume of outstanding call options forces market makers to buy as a hedge (dynamic hedging) when prices rise, amplifying short-term upward moves.
- When momentum fades or options expire, the unwinding of these hedges magnifies the magnitude of pullbacks.
- This mechanism causes price action to exhibit "path dependency" and "intermittent" characteristics, even when fundamentals remain unchanged.
Companies/Assets Involved
- iShares Silver Trust (SLV): A silver ETF whose call option open interest is exceptionally large, serving as the primary structural factor behind current silver market volatility. The report argues that short-term silver volatility will persist until a significant portion of these option positions is liquidated.
- Gold and Silver: The long-term fundamentals for both (monetary uncertainty, fiscal dominance, geopolitical risks, long-term supply constraints) remain unchanged. Silver's short-term volatility does not reflect a loss of confidence in precious metals.
Investment Implications
- Distinguish noise from signal: Investors should not misinterpret silver's sharp short-term volatility as deteriorating fundamentals. The volatility stems from market "plumbing" (options hedging, expiration cycles), not a reassessment of the strategic role of precious metals.
- Utilize volatility rather than avoid it: In an options-driven market environment, price pullbacks may offer entry points for long-term allocation. The report implies that current volatility is structural, not trend-based.
- Focus on long-term structural forces: Rising sovereign debt burdens, persistent inflation risks, currency debasement concerns, and the demand for neutral reserve assets are the slow-moving variables underpinning the long-term prices of gold and silver. Short-term volatility does not negate these trends.