Woshi Deals a Crushing Blow to the “Dollar Weakening Trade”: Gold Plunges, Bitcoin Slumps—How Long Can the Chip Boom Last?

Author: Xu Chao

The "dollar depreciation trade" that dominated Wall Street's trend this year is rapidly unraveling. Federal Reserve Chair Kevin Warsh's hawkish stance has strengthened market expectations for rate hikes, compounded by a strong dollar that has created a dual pressure, causing gold, silver, and bitcoin to break through key support levels. Meanwhile, a large amount of capital is flowing out of precious metals and into semiconductor stocks, but the sustainability of this chip rally is increasingly being questioned by the market.

On Wednesday, gold fell below $4,000 per ounce for the first time in about eight months, down about 29% from its all-time high of around $5,600 in January this year. Silver dropped below $60 per ounce, a decline of more than 50% from its peak of $121. Bitcoin also fell below $60k, hitting a new low since the end of 2024. The US Dollar Index (DXY) has risen 2.8% this month, closing at its highest level in over 14 months, and is on track for its largest monthly gain in nearly a year.

The key turning point in this rapid reversal was Warsh's emphasis on price stability as the top priority during his inaugural Fed press conference, reinforcing market conviction that he will adopt a more aggressive anti-inflation stance. A strong dollar makes dollar-denominated precious metals more expensive for overseas buyers, while rising rate hike expectations directly increase the opportunity cost of holding non-yielding assets.

Micron Technology released a better-than-expected quarterly report after the market close, temporarily stemming selling pressure in the chip sector, and South Korean chip stocks like SK Hynix also rebounded. However, several market participants have warned that this chip rally, accompanied by extreme volatility, is showing several characteristics of a historical top.

Warsh's Hawkish Debut: Interest Rate Expectations Reconstructed, Devaluation Logic Unraveled

The logic of the "dollar depreciation trade" is built on concerns about fiscal profligacy and central bank tolerance of inflation, which has driven gold, silver, and bitcoin higher in recent years. When Warsh was nominated as Fed Chair in January, gold immediately plunged more than 13% in a single day, its largest drop in over four decades, bitcoin subsequently collapsed, and the dollar bottomed out after a prolonged decline—the market voted with prices, showing that Warsh's hawkish credibility was taken seriously from the start.

Robin Brooks of the Brookings Institution believes that the root of the depreciation trade lies in fiscal policy failures, with monetary policy merely an accomplice: when policymakers try to inflate away unsustainable debt, they are forced to turn on the printing press. This framework explains why the market is so sensitive to the Fed nominee and why Warsh's emphasis on price stability in his first press conference was enough to trigger such a violent asset repricing.

Stephen Innes, managing partner at SPI Asset Management, said Warsh's first public appearance has already convinced the market that he is taking a tougher anti-inflation path. The S&P 500 priced in gold—a classic indicator of whether economic growth stems from real expansion or currency depreciation—had already reversed significantly upward three months ago, showing that confidence in the depreciation narrative has collapsed. Notably, the ceasefire agreement in the Middle East also provided additional support for the dollar.

Gold and Silver Deep Correction: Key Support Levels and Buying Windows Emerge

The current precious metals downturn is a dramatic reversal of the historic rally earlier this year. Earlier this year, gold surged to a record high of around $5,600 per ounce, and silver broke above $121, with their gains even surpassing the "Magnificent Seven" stocks, becoming the most crowded momentum trade on Wall Street. Now, that glory is in the past.

Nate Miller, vice president of product development at Amplify ETFs, pointed out that rising yields and a strong dollar have increased the opportunity cost of holding metals. Silver, due to its dual nature as both a precious metal and an industrial raw material, tends to fall more sharply than gold during periods of macroeconomic tightening—which explains why silver has dropped so rapidly this time.

Ben McMillan, chief investment officer at IDX Advisors, believes that rate hike expectations and liquidity liquidation are the "main culprits" for gold's sharp decline, but he also views the current correction as a "generational buying opportunity." Peter Grant, vice president and senior precious metals strategist at Zaner Metals, expects gold's next key support level to be at $3,800 per ounce, with a potential rebound to $4,500 within the year. However, to rebuild market confidence in gold hitting new all-time highs, it needs to return above $4,800.

Strong Dollar and Bitcoin Under Pressure: Negative Correlation Dominates Crypto Trends

Bitcoin's fall below $60k, coupled with the US Dollar Index hitting a 14-month high, once again confirms the long-term negative correlation between the two.

Steven Englander, strategist at Standard Chartered, noted that real and nominal interest rate differentials have been the main driver of dollar strength since early May. He expects the Fed to keep rates unchanged while the European Central Bank still has room for one more rate cut in the first half of next year, with the US-Europe interest rate differential continuing to support the dollar, creating persistent headwinds for bitcoin.

Vincent Deluard of StoneX Financial warned that while the Middle East ceasefire has eased oil price shocks, inflation will not smoothly return to the 2% target but will instead consolidate at a high level in the 3.5% to 4% range.

Torsten Slok, chief economist at Apollo Global, presented a counterintuitive scenario: falling oil prices could act as a tax cut, further stimulating already overheated aggregate demand, thereby pushing up inflation and providing justification for Fed rate hikes—if this path materializes, it would further pressure the depreciation trade.

Capital Rotates into Semiconductors, Chip Stocks Become New Momentum Darlings

Mark Hackett, chief market strategist at Nationwide Investment Management Group, pointed out that a large and highly coordinated wave of capital is moving substantial positions from cryptocurrencies, meme stocks, and precious metals into semiconductor stocks, with South Korean chipmakers like Samsung Electronics and SK Hynix becoming the main destinations of this rotation.

He told MarketWatch that the strong dollar was the trigger for the precious metals sell-off, and changes in Fed policy expectations are the root cause of the dollar's strength. "But it's almost being used as an excuse for investors to collectively liquidate precious metals," he said.

Micron's post-market quarterly report relieved short-term selling pressure in the chip sector: the company's revenue guidance exceeded expectations, earnings also beat expectations significantly, and its trailing twelve-month earnings quadrupled in two quarters. Its market cap after the close returned to approximately $1.4 trillion. SK Hynix, which had triggered a sell-off after announcing a focus on low-margin DRAM memory chips, also received a boost—despite also disclosing a massive $29 billion US stock offering plan on the same day.

Chip Rally Top Signals Emerge, Defensive Layout Becomes Consensus

However, extreme volatility itself is a warning sign. Larry McDonald of Bear Traps Report noted that it is extremely rare for semiconductor stocks to have a market cap swing of over $60k within a few hours, historically only occurring near major market tops or bottoms.

BCA Research recommends ending their long-short strategy that has more than doubled this year—longing emerging market semiconductors and shorting the "Magnificent Seven" mega-cap cloud companies that foot the bill. BCA pointed out that the one-month implied volatility of South Korea's Kospi index has surpassed historical peaks, and historically such levels have occurred at "bear market bottoms, not all-time highs," indicating that the current rally is a top feature "amplified by highly speculative forces."

McDonald also warned that the end of the month, end of the quarter, and the upcoming US long holiday weekend are historically associated with large capital rotations and a sluggish summer market. Heavy new stock issuance will drain the market's capacity to absorb liquidity, and massive insider selling is often a precursor to a top. For investors still holding chip long positions, Micron's post-market strength may offer a relatively good exit opportunity at a high level.