Where Do Silver Prices Head after the Fed Raises Interest Rates?

June 15, 2017

As most expected, the Federal Reserve announced that it will raise interest rates for the fourth time since the financial crisis that began the Great Recession. But even though the news was largely predicted in financial circles, that move will likely be the biggest economic news of the week. As of this morning, both stocks and metals have taken a hit. But how this news will affect silver remains to be seen—which is why it’s time for a silver forecast that takes the latest news into account.

Short-Term Volatility in Silver

This week has already been a particularly bumpy one for the precious metal. Silver started the week over the $17 per troy ounce mark, which is in line with how it had been performing earlier in the year. It faced a rapid decline for a few days before leaping upward again on Wednesday—only for the Federal Reserve news to put a new dash in those precious metal investment hopes. As of this morning, silver has once again dipped under $17 per troy ounce to stay in the upper $16 range.

Does that make this a good time to “buy the silver dip”? To answer that question we have to look beyond the immediate market reaction to the Federal Reserve announcement and find where the fundamentals for precious metals point the way.

The Direct Link Between Interest Rates and Precious Metals

First, there’s the elephant in the room: yes, the success of precious metal prices are highly dependent upon interest rates. If treasuries offer high rates and precious metals offer none, then they’re seen as a more desirable hedge against other investments like the stock market—and metals like silver are not. (On the other hand, metals become an excellent safe haven investment in the absence of interest rates, or even in the presence of negative interest rates).

That being said, it’s worth noting that even though the interest rates have been raised four times since the financial crisis, they’re still at relatively low levels. If the economy shows signs of slowing and we’re stuck with the current rates for more than a few quarters, there’s a possibility that this June announcement is only a hiccup in the long-term progress of silver.

Don’t Forget the U.S. Dollar Index

The U.S. Dollar is up strong thus far today after having lagged over the past week or so. This, perhaps more than anything else, might be to blame for the current gold and silver dips.

But let’s look at the long-term trend, as you can see in this chart from MarketWatch:

 

There we see that precious metals have been able to hold on to prices thanks to a general weakening of the dollar over that time. Does that mean that the current ride has ended, partially thanks to the recent announcement of the Fed? It certainly seems a time for caution in precious metals investing—and in particular, silver—as we enter the hot summer months. Watch for more economic headlines throughout the year to get a gauge on where the Federal Reserve might head in the future.

The Fourth Coinage Act of 1873 embraced the gold standard and demonetized silver, known as the “Crime of 73”

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