Trump's Fed pick has sparked a gold and silver meltdown

• Silver and gold plummeted on Friday. Stocks also pulled back sharply.
• Gold dropped 12% while silver plunged 30%, as traders reacted to Trump's pick for Fed chief.
• Kevin Warsh's nomination boosted the dollar and took the wind out of the debasement trade.

The yearlong party in precious metals looks like it might be coming to an end.

The blistering rally that's pushed gold and silver to a series of all-time highs in the last 12 months saw a brutal reversal on Friday as markets reacted to Donald Trump's pick to run the Federal Reserve.

Gold, which is still up by about 65 % in the last year, dropped 12% to trade around $4,786 an ounce. It marks the worst single-day loss for gold in more than a decade.

Silver, which had far outpaced gold's gain in the last year, plunged as much as 32% to trade around $80 an ounce, the worst loss for the metal since 1980.

Kevin Warsh, a former Fed Governor, will replace Jerome Powell this year if confirmed by the Senate. The news sent metals tumbling on Friday as investors repriced their outlook for monetary policy and the so-called debasement trade that's helped gold's record-setting rally took a hit.

US stocks, which hit record highs earlier this week, also continued to pull back on the news. The tech-heavy Nasdaq Composite dropped more than 1%, while the S&P 500 retreated further from 7,000, the key psychological threshold it surpassed for the first time ever this week.

Here's where US indexes stood 4 p.m. ET closing bell on Friday:

• S&P 500: 6,939.03, down 0.43%
• Dow Jones Industrial Average: 48,892.47, down 0.36% (-179.09 points)
• Nasdaq 100: 25,552.39, down 1.28%

Markets have been worried for months about Trump's Fed pick, as it was believed that Trump would plug in a new Fed chief to aggressively lower interest rates and help his big affordability push.

That's pushed down the value of the US dollar, one trend that's made precious metals more attractive over the past year.

But Warsh, who moved to the front of the line in Trump's Fed Chair search in recent weeks, is considered more hawkish and likely to preserve the Fed's independence.

That last point—that Trump could use his nominee to wrest control of the central bank—has been a big driver of the debasement trade, which has boosted gold and hurt the dollar over the last year.

The US Dollar Index, which has declined 11% in 12 months, spiked shortly after Trump announced his Fed Chair pick on Truth Social, climbing nearly 1% by Friday afternoon.

The dollar's surge appeared to jump-start the sell-off in metals, Art Hogan, the chief market strategist at B. Riley Wealth Management, told Business Insider.

"You knew there was going to be some trigger that would cause a bit of a technical pullback," he said, adding that investors were eager to take profits after the parabolic move in metals over the last 12 months.

José Torres, a senior economist at Interactive Brokers, described the sell-off in metals as a "knee-jerk reaction" to Trump's Fed Chair pick. It's also natural for metals to pull back given the significant move to the upside in recent months, much of which was fueled by hype and speculation, he said.

"What President Trump wants is a dove. However, Warsh historically is an inflation hawk. I think there's a lot of confusion going on right now in terms of what kind of Warsh we're going to get at the Fed," he told Business Insider, pointing to the move in the dollar and precious metals.

"Okay, maybe the central bank is not going to be as loose as it might have been under perhaps Kevin Hassett," he added of the market's thinking.

David Rosenberg, an economist and the founder of Rosenberg Research, noted that Warsh's nomination could have caused some investors to reverse course on the debasement trade, in which investors scoop up hard assets like gold and silver out of concern that the US dollar is at risk from macro forces including higher inflation, chaotic trade policy, and a politicized central bank.

"The market reaction so far points to 'less dovish' and more 'orthodox expectations, with independence fears easing at the margin. There is some unwinding in the so-called debasement trade," Rosenberg wrote in a note to clients on Friday.

Hogan said it was too early to tell whether the debasement trade was truly unwinding, though the reaction on Friday suggested some investors were moving in that direction.

"It's understandable that you're going to get a pretty abrupt reaction when the pressures turn around," he said of the move, speculating that metals could drop further.