By Naeem Aslam
If 'safe' investments like gold and silver can crash in a single day, investors need to reconsider their portfolio hedges
Is this a buying opportunity? That is the wrong question.
For assets that many investors treat as protection, the speed and scale of the wipeout in gold and silver on Friday was unnerving.
The immediate instinct is to ask what went wrong - but that misses the point. The real lesson from this selloff is not about direction or valuation. It is about liquidity - and what happens when too much capital tries to exit the same &#34;safe&#34; trades at once.
The scale of the move is larger than many realize. The sharp pullback across gold (GC00) and silver (SI00) erased an estimated $7.4 trillion in combined market value, based on above-ground supply and prevailing spot prices.
Gold's 9% drop from its peak of $5,598 and silver's 27% fall from its peak of $121 - ostensibly after the announcement of Kevin Warsh, a vocal critic of the Federal Reserve, as President Donald Trump's choice to lead the U.S. central bank - show that this was not a shift in sentiment alone. It was a sudden contraction in global liquidity - one that spilled directly into assets widely regarded as physical stores of value.
This was not a fundamental shock. Inflation data did not suddenly change. Policy expectations did not reverse overnight. What failed was the assumption that assets widely viewed as defensive would remain liquid under stress.
Read: Kevin Warsh isn't who investors think he is - how you can profit from their mistake
When safe assets become crowded exits
Gold and silver had become heavily owned as hedges. That ownership created an illusion of safety - not because prices could not fall, but because investors assumed liquidity would always be available.
When volatility surged, that assumption broke down. Liquidity dried up first where positioning was most crowded. Selling accelerated not because conviction collapsed, but because risk limits, margin requirements and volatility controls forced exposure to be reduced.
This dynamic explains why the selloff felt mechanical rather than emotional. It also explains why silver fell so much harder than gold.
Silver didn't fail - it amplified the stress
Silver sits at the intersection of hedging, speculation and leverage. Its market is thinner, its positioning more aggressive and its volatility structurally higher. When liquidity tightens, silver does not simply follow gold - it magnifies the move.
Gold revealed positioning stress. Silver revealed liquidity stress.
That distinction matters for investors trying to understand what just happened - and what has not yet resolved.
Read: A Fed honeymoon for Trump pick Kevin Warsh? Briefly - then push comes to shove.
Why physical buying doesn't negate the selloff
Reports of buyers rushing into physical markets, including in places such as Dubai, are real - and they are important. They show that price-sensitive demand emerges quickly when volatility forces prices lower.
But physical buying answers a different question than financial selling. Physical demand can stabilize price over time; liquidity stress determines the path in the short term.
This is where many investors go wrong. Seeing physical accumulation and concluding the selloff is &#34;over&#34; confuses two very different forces. Physical buyers react to levels. Financial markets react to volatility, leverage and risk constraints. The two do not operate on the same clock.
The mistake investors make after violent selloffs
The question is not what to buy, but what kind of buyer are you?
After moves like this, the conversation quickly turns to whether the decline represents a buying opportunity. That is the wrong starting point.
The more useful question is not what to buy, but what kind of buyer are you?
Price-sensitive buyers - typically long-term or physical holders - can afford to think in terms of value and accumulation. Liquidity-sensitive holders - those exposed through futures, options or highly traded vehicles - are governed by volatility and risk controls, not conviction.
Confusing one for the other is how investors end up buying into instability rather than opportunity.
The real lesson: Diversify how you hedge, not just what you hedge with
In stressed markets, liquidity - not logic - sets the price.
The deeper takeaway from this episode is uncomfortable but necessary. Many portfolios are diversified by asset class, but not by liquidity behavior. When stress arrives, supposedly different hedges can funnel investors into the same exits at the same time.
That is how trillions of dollars can disappear from assets designed to protect capital.
This does not invalidate gold or silver as long-term hedges. It does challenge the assumption that safety is simply about owning the right assets. In stressed markets, liquidity - not logic - sets the price.
What to watch from here
The &#34;all-clear&#34; signal is not whether prices bounce, but whether volatility compresses. Until it does, liquidity remains fragile. Physical demand may slow declines, but it cannot prevent sharp moves driven by forced repositioning.
The selloff in precious metals was not a rejection of their role. It was a stress test - and it revealed that even safe assets can become unstable when everyone relies on them at once.
Naeem Aslam is chief investment officer at Zaye Capital Markets in London.
More: Silver suffers biggest drop in 46 years, with 'every man and his dog rushing for the exit'
Also read: Trump picking Kevin Warsh as Fed chair wasn't enough to soothe shaky markets
-Naeem Aslam
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
02-01-26 1605ET

<p>Gold and silver experienced a significant market value loss of approximately $7.4 trillion, highlighting the risks associated with perceived safe investments. The selloff was driven by a sudden contraction in global liquidity rather than fundamental changes in market conditions. Investors are urged to reconsider their hedging strategies, focusing on liquidity behavior rather than just asset class diversification. The distinction between price-sensitive and liquidity-sensitive buyers is crucial in understanding market dynamics during volatility. The current market signals caution, as liquidity remains fragile despite potential physical demand stabilizing prices over time.</p>

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Gold and silver's $7 trillion wipeout delivers a painful lesson about risk