Washington deals a heavy blow to the "short dollar trade"! Gold crashes, Bitcoin plunges—how long can the chip frenzy last?

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The “dollar depreciation trade” that has dominated Wall Street this year is rapidly collapsing. The hawkish stance of Federal Reserve Chairman Kevin Warsh has strengthened market expectations of rate hikes, coupled with a surge in the dollar forming a double squeeze, causing gold, silver, and bitcoin to consecutively lose key price levels. Meanwhile, large amounts of capital are flowing out of precious metals and into the semiconductor sector, but the sustainability of this chip frenzy is being increasingly questioned by the market.

On Wednesday, gold fell below $4,000 per ounce, its first breach in nearly eight months and a drop of about 29% from the historic high of around $5,600 in January; silver fell below $60 per ounce, more than a 50% retreat from its $121 peak; Bitcoin simultaneously dropped below $60,000, marking a new low since the end of 2024. The Dollar Index (DXY) has risen 2.8% this month, closing at a 14-month high and is on track for its biggest monthly gain in nearly a year.

The pivotal event tipping the balance was Warsh’s prioritization of price stability above all else at the Fed’s press conference, further convincing the market that he will take a more aggressive anti-inflation stance. The strong dollar makes dollar-priced precious metals more expensive for overseas buyers, and rising expectations of rate hikes directly increase the opportunity cost of holding non-yielding assets.

Micron Technology’s post-market earnings report exceeded expectations, temporarily halting the sell-off in chip stocks, and Korean chip stocks such as SK Hynix also rebounded. However, several market participants warn that the chip sector, amid extreme volatility, is showing characteristics of a historical top.

Warsh’s Hawkish Debut: Rate Expectations Reconstructed, Depreciation Logic Collapses

The logic of the “dollar depreciation trade” is grounded in concerns over fiscal profligacy and central bank indulgence of inflation, which have fueled the rise of gold, silver, and bitcoin in recent years. When Warsh was nominated as Fed Chair in January this year, gold plunged over 13% in a day—its largest single-day drop in forty years—followed by Bitcoin’s collapse, and after a long decline, the dollar rebounded from its lows — the market voted with prices, showing that Warsh’s hawkish credibility was taken seriously from the outset.

Robin Brooks from the Brookings Institution believes that the roots of the depreciation trade lie in misguided fiscal policy, with monetary policy merely an “accomplice”: when policymakers attempt to dilute unsustainable debt with inflation, they are compelled to fire up the printing presses. This framework explains why the market is so sensitive to Fed leadership and why Warsh’s emphasis on price stability at his first press conference triggered such massive asset repricing.

Stephen Innes, Executive Partner at SPI Asset Management, states that Warsh’s first public appearance has convinced the market he is taking a tougher anti-inflation approach. The S&P 500 Index priced in gold—a classic measure of whether economic growth comes from real expansion or currency depreciation—reversed significantly upward three months ago, signaling a collapse in confidence in the depreciation narrative. Notably, the Middle East ceasefire agreement has also given the dollar extra momentum.

Gold and Silver See Deep Corrections, Key Support Levels and Buying Windows Emerge

This round of precious metal declines is a dramatic reversal of the historic rally earlier this year. Earlier, gold surged to a record high around $5,600 an ounce, silver broke $121, and their rallies even outpaced the “Technology Magnificent Seven,” becoming Wall Street’s most crowded momentum trades. That spectacle is now over.

Nate Miller, Vice President of Product Development at Amplify ETFs, notes that rising yields and a stronger dollar both raise the opportunity cost of holding metals; silver, with its dual role as a precious metal and industrial material, tends to fall more sharply than gold during periods of macro tightening—explaining the steep drop this time.

Ben McMillan, Chief Investment Officer of IDX Advisors, considers rate hike expectations and liquidity clearing as the “main culprit” for gold's slump, but also sees the current pullback as a “generational buying opportunity.” Peter Grant, Vice President and Senior Precious Metals Strategist at Zaner Metals, forecasts the next key support for gold at $3,800 per ounce, with a possible rebound to $4,500 within the year; but to restore market confidence in gold setting new highs, it will need to move back above $4,800.

Dollar Strength Pressures Bitcoin: Negative Correlation Dominates Crypto Performance

Bitcoin’s fall below $60,000 and the Dollar Index’s climb to a 14-month high once again confirm their long-standing negative correlation.

Steven Englander, strategist at Standard Chartered Bank, points to differences between real and nominal interest rates as the main driver of the dollar’s strength since early May, predicting the Fed will keep rates unchanged, while the European Central Bank has room for one more rate cut in the first half of next year. The U.S.-EU rate spread will continue to support the dollar, creating persistent headwinds for Bitcoin.

Vincent Deluard of StoneX Financial cautions that, although the Middle East ceasefire relieves oil price shocks, inflation won’t easily return to the 2% goal, but will remain high in the 3.5%–4% range.

Torsten Slok, Chief Economist at Apollo Global, presents a counterintuitive scenario: falling oil prices could act like a tax cut, further stimulating already overheated aggregate demand and pushing up inflation, thereby providing grounds for the Fed to raise rates—if this path is realized, depreciation trades will come under further pressure.

Funds Rotate Into Semiconductors, Chip Stocks Become New Momentum Favorites

Mark Hackett, Chief Market Strategist at Nationwide Investment Management Group, points out that a large and highly coordinated pool of funds is collectively shifting big positions from cryptocurrencies, meme stocks, and precious metals into semiconductor stocks, with Korean chip makers like Samsung Electronics and SK Hynix as primary destinations.

He told MarketWatch that dollar strength is the main trigger for the precious metals sell-off, while the change in Fed policy expectations is the root cause for the dollar’s rally. “But it's almost taken as an excuse for investors to collectively clear out precious metals,” he said.

Micron’s post-market earnings erased chip sector’s short-term selling pressures: the company’s revenue guidance exceeded expectations, profits were significantly better than anticipated, and its 12-month rolling earnings quadrupled in two quarters, with its post-market value returning to about $1.4 trillion. SK Hynix, which had been sold off for committing to produce low-margin DRAM memory chips, also rebounded—despite revealing a $29 billion U.S. share issuance plan the same day.

Chip Sector Top Signals Emerge, Defensive Positioning Becomes Consensus

However, extreme volatility itself is already a warning sign. Larry McDonald of Bear Traps Report points out that it's extremely rare for chip stocks to swing by over $100 billion in market value within hours, historically only occurring near major market tops or bottoms.

BCA Research advises ending the long strategy that has doubled returns since the start of the year—i.e., going long emerging market semiconductors, shorting the “Technology Magnificent Seven” cloud giants. BCA notes that the one-month implied volatility of Korea's Composite Stock Price Index (Kospi) has surpassed historical highs, levels usually seen at “bear market bottoms rather than historic tops”—indicating the current rally has “top characteristics driven by highly speculative forces.”

McDonald further warns that month-end, quarter-end, and the approaching U.S. long holiday weekend are traditionally times of major portfolio rotations and summer market sluggishness; intensive IPOs will exhaust market liquidity absorption capacity, and large-scale insider selling is often a precursor to market tops. For investors still holding chip longs, Micron’s post-market rally may offer a relatively good high-level exit opportunity.

Risk Disclosure and DisclaimerMarkets are risky and investments should be made cautiously. This article does not constitute personal investment advice, nor does it consider the specific investment goals, financial situation, or needs of individual users. Users should decide whether any opinions, views, or conclusions contained herein suit their own circumstances. Investing based on this article is at your own risk. ```