Silver Price: What the Fed is Saying about Rates and What It Means for Precious Metals

October 5, 2017

When gold analysts and experts talk about the Federal Reserve and its policies, the usual insinuation is that these policies affect the value of the dollar, which in turn affects the value of gold. And that’s true. But what many investors forget is that there’s an entirely different precious metal whose investors are just as interested in the value of the dollar: silver. In gauging the silver price’s current health, it pays to know what’s going on with the Federal Reserve. Here’s the latest.

For Now, Expect the Fed to Raise Rates

The current feeling is that the Federal Reserve will continue to raise rates, even though it’s been a slow process ever since rates were slashed to zero during the Great Recession. The New York Times pointed out that this is in spite of “the mysterious weakness of inflation,” which has some analysts worried that the Federal Reserve’s choices at this point are highly limited.

Said Yellen: “Given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2 percent.” That 2 percent mark, of course, tends to be the Federal Reserve’s goal—it’s seen as a stable rate of inflation on an annual basis. (Therefore, investors who want quality returns out of metals like silver are hoping to at least match or beat that basis).

The Impact of Rates on Silver’s Price

Some investors might wonder if there really is such a strong correlation between the actions of the Federal Reserve and where precious metals including silver go. In fact, earlier this year, metals including silver went up after a rate hike announcement. But the reasons for an anomaly like this aren’t necessarily straight-forward. For example, one has to consider that the rate hike announcement was already expected, which means that the news was already “baked in” to the price, as investors say. That means that while a long-term trend like downward pressure on gold with rate hikes might be the truth, it doesn’t mean gold and silver will automatically go down that day.

That’s especially important to understand with silver, which tends to be more volatile than gold. Silver does engage in long-term trends as any precious metal would, but don’t necessarily expect that a rate hike announcement means you have to sell off your silver stocks that exact day.

Today’s Silver Prices

The price of silver is in the upper $16 per troy ounce range after a small rebound yesterday which might put an end to the recent declines. Silver went above $18 per troy ounce in the middle of September, and then followed the short-term cycle back down. We might be at the bottom of that cycle right now, but only markets can ever truly bear this out.

Year to date, the price of silver has moved only a little, upward from the lower $16 per troy ounce range. That means there’s still plenty of room for either direction, depending on further movement in the economy and the Federal Reserve.

1 cubic foot of silver weighs approx 655 pounds whereas 1 cubic foot of gold weighs more than half a ton.

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