January CPI Rekindles Rate Cut Hopes. Gold and Silver Rebound But Is a Major Bull Market Still Ahead?

TradingKey - During Friday's US trading session, spot gold (XAUUSD) climbed back above $5,000 to close at $5,043; silver (XAGUSD) also resumed its rally, breaking back above the $75 mark and peaking near $79 before closing at $77.43.

This was primarily driven by January data released by the U.S. Bureau of Labor Statistics on Friday that significantly exceeded market expectations: the year-on-year CPI fell to 2.4%, while core CPI dropped to 2.5%, marking the lowest level in four years.

The unexpected decline in inflation has created policy room for the Federal Reserve to cut interest rates in June. Interest rate futures markets show that traders currently estimate about a 50% probability of a third rate cut this year.

Rate cuts are generally bullish for gold and silver. On one hand, as non-interest-bearing assets, gold and silver have lower carrying costs in a low-rate environment; on the other hand, rate cuts typically reduce the attractiveness of the U.S. dollar, prompting capital outflows, weakening the dollar, and giving dollar-denominated precious metals a greater price advantage.

However, in the long run, how much further upside can be expected for gold and silver in 2026?

Fed Policy Uncertainty Remains Key

Non-farm payroll data released Wednesday showed unexpectedly strong job growth in January, reaching 130,000—the largest monthly gain in over a year—while the unemployment rate fell to 4.3%. Given this data, markets expected the Fed to delay rate cuts. Conversely, the CPI data released Friday, showing falling inflation, supported the opposite expectation.

The current situation is that labor market resilience has significantly reduced the urgency for rate cuts, yet the inflation cooling could allow for an additional cut. How will the Fed choose? The outlook is becoming increasingly murky.

Considering Jerome Powell's retirement in May and Kevin Warsh's succession, forecasting the Fed's monetary policy will become even more difficult. Although Warsh has consistently shown loyalty to Donald Trump—echoing Trump's criticism that Powell was too slow to cut rates—it is undeniable that his forecasting record as a Fed Governor skewed hawkish, with near-zero tolerance for inflation. Once in office, it remains to be seen whether Warsh will stick to his economic principles or maintain his political stance.

Some analysts believe Warsh supports rate cuts not just to align with Trump, but because he genuinely believes economic conditions have shifted. He argues that advancements in AI and other sectors have boosted corporate productivity, allowing firms to increase output without major price hikes, thus making sustained growth alongside suppressed inflation achievable. He believes the combination of steady growth and slowing inflation could create room for lower interest rates without an economic collapse. In short, if Warsh holds this view, he may be more aggressive in cutting rates than Powell.

Currently, Wall Street leans toward predicting a unique policy path involving both rate cuts and quantitative tightening (QT). However, before he takes office, the Fed is likely to maintain a wait-and-see approach on the rate-cut trajectory, refusing to cut without compelling data support. As of February 14, according to the CME FedWatch Tool, only 9.2% of participants expect a rate cut in March.

Until there is a 180-degree shift in market expectations for rate cuts, gold and silver prices, lacking catalysts, are unlikely to see significant volatility driven by Fed monetary policy.

Speculative Sentiment in Precious Metals Markets Weakens Significantly

Following an epic crash in both gold and silver in late January, traders have clearly turned more conservative. VXSLV, a measure of silver volatility, peaked at 111.16 during the crash but has since returned to around 70. CME Group's gold volatility index closed at 29.16, down from a high of 48.68 during the January collapse. Precious metals investors have now shifted to a cautious, wait-and-see stance.

This is not only due to the recent crash but also a result of CME Group repeatedly hiking margin requirements for Comex gold, silver, and other precious metal futures contracts. To curb speculation and shake out retail investors, CME raised the initial margin for silver futures to 18% in early February, with slight increases for gold as well. The traders remaining in the market are mostly well-capitalized and less prone to forced liquidations, which has also mitigated the risk of sharp short-term declines.

The decline in speculative trading will significantly reduce the momentum for large short-term price swings in gold and silver, likely leading to continued sideways trading around current key levels.

Long-term Bullish Case for Gold Remains Intact, but Watch These Three Factors

Despite cooling speculative sentiment, the medium-to-long-term bullish logic for precious metals—particularly gold—remains unchanged. Doubts over Fed independence, inflation risks, the U.S. debt crisis, unpredictable geopolitical factors, and the persistent long-term trend of de-dollarization, combined with continuous increases in gold allocations by central banks and institutions, have made gold's status increasingly vital. In terms of market value, gold has already supplanted U.S. Treasuries as the largest reserve asset for global central banks.

As for silver, fundamental support from the supply-demand deficit persists, providing the primary floor that keeps prices stable near $80. However, this is unlikely to drive further significant rallies unless the supply-demand gap widens substantially.

For gold and silver prices, the most critical factors to watch now are Warsh’s timeline for balance sheet reduction, the spillover effects of U.S. stock market movements, and shifts in speculative trading.

Jerome Powell did not pursue aggressive balance sheet reduction during his tenure. If Warsh accelerates quantitative tightening (QT), it could trigger a massive shift in market expectations, thereby impacting precious metal prices. Shrinking the balance sheet tends to push up real interest rates, which is bearish for gold and silver.

If the U.S. stock market experiences a violent and deep correction in the first half of 2026, traders might again sell gold and silver to cover margin calls; however, if a full-blown bear market ensues, capital would likely flow into safe-haven assets like gold and silver. Additionally, investors should monitor Commitment of Traders (COT) reports for signals of speculative capital re-entering the market.