Silver spot price gains ahead of US GDP data

London (Dec 20)   The spot price of silver has gained about one percent intraday on what appears to be a short-covering rally from the one-week low of 19.11 reached in yesterday’s US session. The precious metal has been under intense pressure since the US Federal Reserve announced the start of QE tapering on Wednesday. The decision has boosted the US Dollar Index, which set a fresh 17-day high of 80.97 in today’s Asian trading.

The US central bank took the first step away from the easy-money policies implemented since the global financial crisis by reducing the pace of its asset purchases to $75 billion per month from $85 billion. In an attempt to soften market jitters and supress rate-tightening expectations, the Federal Open Market Committee strengthened the Fed’s forward guidance by adding a ‘soft inflation floor’. The central bank’s pledge to maintain low rates is expressed through new language but without adding an actual lower bound inflation target, which would be a firmer commitment. 

As analysts at Nomura put it, “the big picture is one where the Fed is willing to scale back stimulus but not willing to enhance forward guidance in a dramatic fashion”. “This is a dollar-bullish combination”, in Nomura’s view, and the market dynamics have been consistent with this notion.

In fact, the majority of experts expect US GDP growth to shift to above-trend growth in 2014, setting the stage for the markets to start questioning the Fed’s commitment to keep rates low for a prolonged period.

“2013 was another relatively weak year for US growth because increasing fiscal drag, from federal tax hikes and spending cuts, offset the positive impulse from the private sector,” observes Hatzius. If the private sector impulse stays positive in 2014 and “with [the US] fiscal drag receding, this should allow the economy to accelerate to an above-trend GDP growth rate”, clarifies Goldman’s chief economist.

Today the market awaits the Q3 US GDP release, due out at 13.30 BST. Analysts expect that the reading will confirm the initially estimated growth of 3.6 percent q/y.

Michael Carey, North America chief economist at Credit Agricole, expects the GDP figures to be revised higher, to 3.8 percent, “with stronger-than-expected services spending boosting consumption growth.”

Carey adds that “an upward-revision to US Q3 GDP today will, if anything, reinforce the notion of strengthening US growth.”

Right now, silver is trading around 19.375, up 0.99 percent intraday.