Precious Metals Rally to Record Highs While Dollar Fundamentals Crack Under Pressure

Gold and silver just posted fresh all-time highs on Friday, with February COMEX gold jumping +1.11% and March COMEX silver surging +7.69%. The rally caps off what’s been a relentless year-end buying spree, but here’s what’s really driving it: the dollar’s fundamentals are falling apart.

The Dollar Index (DXY) dropped about -0.6% on the week, despite what looked like a strong catalyst—Tuesday’s better-than-expected US GDP report showing +4.3% growth. That initial boost to the dollar quickly fizzled, revealing something more troubling underneath: the fundamental gap between the Fed and other major central banks is widening.

Here’s the crux of it. Markets are now pricing in roughly -50 bp of Fed rate cuts in 2026, while the Bank of Japan is expected to hike by another +25 bp and the ECB is likely holding steady. That interest rate divergence normally supports the dollar, but it’s being obliterated by other factors.

What’s Crushing the Dollar’s Fundamentals

The Fed’s latest move to inject $40 billion monthly into T-bill purchases since mid-December is essentially pumping liquidity into the system—classic dollar-weakening fuel. Worse for greenback supporters, President Trump is signaling he’ll pick a dovish Fed Chair, with Kevin Hassett seen as the likely candidate. Markets interpret that as a future of even looser monetary policy, which naturally weighs on currency fundamentals.

Add in the geopolitical noise: US military strikes on ISIS targets in Nigeria (an OPEC member), continued blockades on Venezuelan sanctioned oil tankers—these tensions keep risk premium elevated and push capital toward safe-haven assets like precious metals.

Central Banks Are Still Loading Up on Gold

The fundamental support for bullion remains rock solid. China’s PBOC reserves climbed by +30,000 ounces to 74.1 million troy ounces in November—that’s thirteen consecutive months of accumulation. Meanwhile, global central banks scooped up 220 MT of gold in Q3, up +28% from Q2. That kind of structural demand usually overwhelms short-term price movements.

Fund flows are equally bullish, with silver ETF long holdings hitting a 3.5-year high earlier this week before pulling back slightly. Gold ETF holdings have recovered over the past two months and sit just below their 3.25-year October peak.

Why the Dollar’s Weakness Matters

EUR/USD rose +0.03% as ECB officials signaled comfort with current rates. The yen (USD/JPY +0.31%) has underlying support from the BOJ’s recent +25 bp hike and a 26-year high in 10-year JGB yields, though that’s being tempered by weaker December Tokyo CPI data (+2.0% y/y vs. expectations of +2.3%) and disappointing industrial production figures.

The dollar’s fundamental weakness comes down to this: while US growth numbers look decent on the surface, the prospect of easier Fed policy ahead, combined with rate hikes abroad, is shifting the calculus. Traders are essentially betting that future US policy will be looser, not tighter—a bearish signal for currency fundamentals.

The Takeaway

Precious metals are climbing because the dollar’s fundamentals are deteriorating, not improving. Central banks continue accumulating gold as insurance, geopolitical risks provide safe-haven tailwinds, and the Fed’s liquidity injections keep real rates under pressure. Until the Fed’s fundamental policy stance shifts, expect gold and silver to maintain their bid.