Silver Takes A Dip On Hawkish Fed Meeting Minutes

Wednesday, August 17, 2016

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Silver has been an incredibly interesting commodity to watch throughout the year, and for good reason. The value of the commodity has seen massive gains. However, today silver seems to be having a rough start to the trading session as yesterday's hawkish release from the FOMC led to concerns with regard to a rate hike. Consequently, we'll talk about what a rate hike has to do with the price of silver, what we saw from the FOMC Meeting Minutes, and what we can expect to see from the price of silver ahead.

What Does The Fed's Interest Rate Have To Do With The Price Of Silver?

At first glance it may seem as though the Federal Funds rate and the price of silver are two completely different topics. However, when we look closer into the two, we find that they are actually very related. Here's how it all works.

Like most commodities, silver is priced using the United States dollar. This means that when the USD heads upward in value, silver becomes more expensive in nations outside of the US. As a result of the lower accessibility associated with higher prices, demand for the precious metal declines; leading to declines in price. Adversely, when the USD falls in value, silver becomes less expensive in nations outside of the US. As a result of the higher accessibility associated with lower prices, demand climbs, leading to gains in the value of the precious metal. This is where interest rates come in.

Years ago, the United States along with most developed nations around the world chose to leave the silver standard. This means that instead of being backed by silver, the USD became backed by the strength and stability of the United States. Essentially, there's no real backing. However, there is interest. Essentially, because of the way fiat currencies work, when interest rates are increased, more investors want the USD, leading to gains in value. Of course, this leads to declines in the price of silver. Consequently, the FOMC meeting minutes with regard to a possible coming interest rate change is an incredibly important update for anyone considering investing in silver.

What We Learned From The Meeting Minutes

At this point it seems as though the Federal Reserve is changing its view on the economy from a dovish one to a more hawkish view. This means that the strong economic reports including strong jobs data and strong consumer spending are improving the Fed's overall view on the future for the United States economy. As a result, an interest rate increase could come as soon as September; thus threatening the bullish trend we've seen on the price of silver throughout the year.

What I'm Expecting To See From Silver Ahead

While the FOMC meeting minutes did lead to a bit of a bearish move in the market, I have to say that I'm not concerned. In fact, I see today's declines as a buying opportunity. At the end of the day, I understand that there is a case for a rate hike, but don't think that one will be happening as soon as next month. On top of that, even if a rate hike were to occur, it would likely lead to a short-term dip in the value of silver before gains continued. The reality is that even if the Fed does increase its rate, global economic conditions remain a massive concern. With government bond yields continuing to decline around the world, gold and silver are the strongest safe havens available. As a result, I'm expecting for safe haven demand to continue lifting the price of the precious metal ahead.

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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.