Silver Price Edges Up Following BOJ Stimulus In Anticipation Of The Fed

Wednesday, September 21, 2016

silver bars

Today is an incredibly interesting day for silver investors. That's because the price of the commodity is heading up in a big way following news from the Bank of Japan - and in anticipation of news from the Federal Reserve. Today, we'll talk about what these two stories have to do with the price of silver, what we saw from the BoJ, what we can expect to see from the Federal Reserve, and how I'm expecting for silver's price to react to the news.

Why Watch Economic Data When Investing In Silver?

Throughout my career, I've had countless people ask why, if I invest in precious metals and stocks, do I pay so much attention to economic conditions. I know that at first glance, the price of silver and the Bank of Japan or the Federal Reserve seem like very different topics. However, they all have a relationship. First and foremost, silver is priced using the USD. Therefore, any news with regard to the state of the United States economy will likely lead to movement in the market. Also, silver is largely considered to be a safe haven investment. That means when economic and market conditions are disconcerting, many investors flock to the commodity to maintain the purchasing power of their money. So naturally, economic data out of any of the world's top economies will generally lead to movement in the price of silver.

Bank Of Japan Acts

One of the big stories that investors have been tracking is the Bank of Japan. Unfortunately, the Japanese economy, the third largest in the world, has been struggling as of late. However, following a recent election, there were hopes that stimulus would be added and economic conditions would improve. Today, those hopes are coming to fruition.

Today, the Bank of Japan acted by saying that it would take steps to get the 10-year bond yield up from the current standing at -0.3% to 0% flat. One of the big problems in the country is that short-term debt and long-term debt have been nearly the same yield. Without the benefit of earning from interest, banks have less of a reason to approve long-term debt. The hope is to increase the value of long-term debt, causing banks to give more loans. However, at the scale that Japan is doing this, it is highly experimental. Consequently, no one really knows just what's going to happen.

Federal Reserve Bank

Another story that seems to be on the top of the list for investors everywhere is the Federal Reserve's decision. The central bank has been working to push interest rates up. However, poor economic conditions have slowed these plans. Nonetheless, the bank is in the midst of a meeting at the moment, and many believe that this will be the month of higher interest.

In general higher interest generally means a higher value for the USD. That would be overwhelmingly bad for the price of silver. After all, because silver is priced using the USD, demand in other nations would fall as a result of more expensive exchange rates. On top of that, it would be a strong signal of economic growth, leading to less safe haven demand.

Will The Fed Raise Rates?

In my opinion, the answer is no. While I will admit that the argument for higher rates is growing stronger and stronger with each passing day, I don't think we're there just yet. Those that believe that rates will rise this month are largely tied on outdated data. The most recent economic data out of the United States shows slowing growth in consumer spending, jobs and more. This mixed with still concerning global economic conditions will likely lead to yet another delay.

What Does That Mean For The Price of Silver

Ultimately, it means that I believe that the price of silver has a much better chance of heading upward than heading downward. Consequently with conditions not right for an interest rate hike, low interest will likely continue to support growth. This combined with safe haven demand as a result of questions with regard to Japan's economy and other economies around the world will likely lead to further gains. 

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.