Why Gold and Silver will Eventually Begin Rising Again
On Wednesday the Federal Reserve issued a statement after their Open Market Committee Meeting that they will not be raising interest rates any time soon. The statement immediately caused a massive short covering sending Gold and Silver sharply higher. Equity prices also were higher as traders celebrated that low interest rate policies would continue.
One of the biggest realizations from the statement by the Federal Reserve is that it may never be able to truly begin tightening monetary policy. Even if interest rates are raised by a quarter point later this year, rates will remain below normal levels for a long time. That is unless the bond market eventually revolts against the Fed and other Central Banks.
Central Banks Face a Big Problem: The Currency Markets
The biggest problem the Fed has in raising rates in the surging US Dollar. In a world where almost every Central Bank is cutting rates, some of which are negative, the implications of even slightly higher rates in the US could be disastrous. With the global economy so inter-connected the Fed is not willing to be the only Central Bank tightening monetary policy.
The policy moves by Central Banks has created a lot of uncertainty in the currency markets. After the Fed announcement on Wednesday the Dollar Index sank by as much as 3% which is a massive move for a currency. (Source: CNBC 2015 March 19th) With traders attempting to “front-run” Central Bank policy moves, volatility in bonds, currencies and commodities will continue.
Has the Fed Lost Control?
Friday’s price action is a perfect example of what is going to happen when the Dollar rally comes to an end. Most investors and traders have been long the US Dollar and when that trade unwinds we see how dramatic the price movements are. Silver was up almost 4% on Friday with Gold posting over a 1% gain.
As we have said before forecasting the short term movements in both Gold and Silver is difficult, however, with Gold re-testing support levels this week, the downside is limited. The Central banks of the US, Japan, and Europe are all scared to death of deflation. Which means that policy decisions will ultimately be geared toward currency de-valuation and inflation at a later stage.
This week the Fed may have delivered the first signal that it has lost control. Zero percent interest rates, rising geo-political conflicts and currency wars all point to the loss of purchasing power with paper currencies. For those who have been waiting for the right time to buy Gold and Silver, it may be now.
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