Why Did The Rate Hike Seem To Help The Price Of Silver?
This week’s long-anticipated interest rate hike from the Federal Reserve was largely expected. What was unexpected, however, was just how the markets would react. If anything, the markets reacted as if there had been an interest rate decrease, which in turn seemed to help both the price of gold and the price of silver.
So what exactly is it that’s fueling the price of silver right now, and does it have to do with the rate hike? Let’s examine the reaction of silver’s price more closely:
The Usual Reaction To Federal Reserve Rate Hikes
The idea behind the Federal Reserve rate hike is that it will generally slow the momentum of money moving through the system—just as lowering interest rates is meant to get money moving. With tighter policy for money, the US dollar is generally believed to increase in value, which in turn allows you to buy more silver with the dollars you have—driving the price of silver lower.
What we saw yesterday didn’t look like that. As the Motley Fool points out, silver and gold both reacted as if there had been an interest rate decrease.
Silver moved 2.6% up, defying expectations and causing many in the market to start scratching their heads. So what exactly is going on here?
Post-Hike Moves Surprise Goldman
Although many experts foresaw the idea that the Fed hike was “baked in” to the current market conditions and prices, not many people expected to see such a sharp move upward. Goldman’s Jan Hatzius responded to a Q & A by pointing out just how surprising this reaction was. In these answers, Hatzius pointed out that it wasn’t exactly the arrow of the reaction, but the volume of that arrow, that raised eyebrows around Wall Street.
But we’re left with an additional question: what does this mean for silver if there are going to be future rate hikes?
The Interest Rate Hike’s Effects On The Price of Silver
Clearly, we’re no longer in an environment where a simple interest rate hike can be seen as an easy predictor of silver’s direction. Though if you would have asked us a few days ago what a hike meant for gold and silver we probably would have given you the conventional answer, the truth is that the environment seems to have changed.
If Wall Street is already factoring in three rate hikes this year, as the Motley Fool mentions, then it’s possible that this reaction isn’t all that surprising at all. Silver and gold investors may already believe that these hikes are baked into the market conditions. One simple rate hike at the beginning of the year isn’t enough to turn anyone off of gold and silver, at least for the time being.
What remains to be seen is how the market reacts to additional hikes, which now appear all but inevitable to happen this year. If Wall Street is already counting on these hikes, we may see similar results. But at some point, large asset prices will have to be addressed—either through a correction or through policy. And that means silver continues to be a safe haven for those who don’t trust the current market conditions.