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Market awaits Trump, and Fed reaction
28 Feb 2017
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22 Feb 2017
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20 Feb 2017
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16 Feb 2017
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16 Feb 2017
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15 Feb 2017
Silver hovers around resistance at $18
14 Feb 2017
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14 Feb 2017
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13 Feb 2017
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09 Feb 2017
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09 Feb 2017
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08 Feb 2017
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08 Feb 2017
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07 Feb 2017
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02 Feb 2017
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01 Feb 2017
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01 Feb 2017
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 Tuesday 14 February 2017

Silver hovers around resistance at $18

 

 

Silver has had a solid run since hitting a multi-month low at the end of December. It has steadily rallied from below $15.70 per ounce to just above $18 for a 14% rise over the past six weeks. For comparison gold has risen close to 9% over the same period.

hello sailor

There are a number of key drivers for the silver price. First is what is happening to the US dollar. Silver is mainly traded in dollars and if the dollar rises in value it costs non-dollar holders more to convert their respective currencies to buy dollar-denominated commodities. At the beginning of this year the Dollar Index was trading at a 14-year high of 103.80 and this was weighing on precious metals. But the index has lost around 3% since then. One of the biggest drivers of currency movement is the interest rate differential between the two currencies in a currency pair. At the moment the US Federal Reserve is the only developed world central bank which is actively tightening monetary policy. Consequently, this is supporting the dollar against other currencies. On top of this, typically gold and silver are non-yielding assets (some financial institutions lend out their gold holdings and get paid interest, but that’s another matter) and this means that neither benefit from a rise in US rates. In fact the opposite is true as investors are more likely to move funds out of zero-yielding assets into yielding ones when rates are rising.

So this suggests that gold and silver could struggle to make much more headway over the coming months. However, it could be that the Fed holds off from aggressively raising rates this year. After all, at the end of 2015 the FOMC signalled a full 100 basis points-worth of hikes through 2016 but only managed 25 basis points. And while the US central bank has met its employment target, the outlook for inflation is more nuanced. By some measures inflation is still somewhat below the Fed’s 2% target. Yet no one is quite sure about the outlook for fiscal stimulus. President Trump made plenty of campaign promises concerning tax cuts, infrastructure spending and regulatory roll-back and given his actions so far, there can be little doubt that he expects to follow through on his promises. But how he goes about achieving this and whether he can push his plans through Congress or not are big uncertainties. It’s worth remembering that in times of uncertainty investors seek out precious metals as safe havens. Now with the US dollar being the world’s reserve currency it can happen that in times of deep financial stress precious metals can rise along with the dollar. This wouldn’t happen if the stress stemmed from activities in the US, but it would happen if the concerns were more globally widely spread.

So on the face of it, it looks as if silver could struggle to make serious gains if, as seems likely, the US Federal Reserve is likely to tighten monetary policy further over the course of this year. However, that’s not the whole story. If there’s a sudden pick-up in inflation, or an event which leads to a rush into safe havens (and an equity or bond market sell-off) then silver and gold could both be major beneficiaries. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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