What Silver and Gold's Recent Crash Tells Us About the Market

Silver and gold are what you might normally load up on if you're worried about where the economy might be headed. And over the past several months, the prices of these metals have been soaring. With such significant price movements, you might be led to believe that many investors are worried about more than just your average recession.

There's also likely been a healthy dose of speculation along the way. Many analysts have compared the volatility of these metals to that of meme stocks in recent years and to their unpredictable nature. But toward the end of January, silver and metal prices crashed significantly. And this could offer some hints on how investors view the overall market right now, and what it might mean if you're looking to diversify and reduce risk.

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The Fed chair pick that rattled silver and gold prices

On Jan. 30, the big news of the day was that President Trump had picked who he'd like to lead the Federal Reserve once Jerome Powell's term ends in May: Kevin Warsh. The move appeared to ease investor concerns about the Fed's independence, and in doing so, led to a significant decline in gold and silver prices.

Gold, which was trading around $5,300 per ounce, fell well below $5,000. While it's around those levels now, it marks a significant decline. Silver also crashed from around $115 per ounce to now trading around $80. The iShares Silver Trust (NYSEMKT: SLV), which has been a popular fund for investors to hold to gain exposure to silver, is still up 10% since the start of the year, but it's down 31% from its high of $109.83.

Investing in silver and gold may be riskier than ever before

What the recent volatility in gold and silver tells us is just how speculative these assets have become of late, as they appear to have become ways for speculators to bet not only on the economy's future performance but also on the confidence in the new Fed chairman.

As investor concerns appear to have eased about the Fed, and the S&P 500 has risen by around 2% since the start of the year, there may be less of an appetite from retail investors to hold these traditionally low-risk assets in the near future. But if there are signs that the Fed chairman may not be as independent as the market expects, then there could once again be a rush to buy gold and silver.

For investors who typically look to gold and silver to diversify their portfolios, this may suggest that these assets are riskier and more volatile than usual. And instead of investing in them to reduce your risk, you may be better off simply investing in dividend stocks.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.