Precious metals like silver and gold dulled under the Federal Reserve. When the Federal Reserve raised interest rates in December, silver prices took another hit.
But after stocks got off to their worst start to the year ever, Janet Yellen failed to raise rates again in January. And silver bulls rejoiced. The absence of further rate increases should help propel silver prices higher throughout 2016.
Worst Start to Stock Market Rocks Silver Prices
After four straight years of declines, silver prices are getting a much deserved boost from Janet Yellen.
Back in mid-December, the Fed raised its federal funds rate for the first time since 2006. Optimistic that the U.S. economy was healthy enough to stand on its own, the Fed raised its rate from 0.25% to 0.5%. (Source: “Decisions Regarding Monetary Policy Implementation,” Federal Reserve web site, December 16, 2015.)
Not great news for precious metal bulls.
Stock market momentum and news of a stronger U.S. economy kept silver prices down and things didn’t look great for silver or gold heading into 2016.
The Federal Reserve may be able to manipulate interest rates and champion the economy till the U.S. traders come home, but its smoke and mirrors don’t reach around the world.
Stocks imploded at the beginning of 2016 and the echo continues. After years of double-digit gains, the S&P 500 is down seven percent. The Dow Jones Industrial Average, meanwhile, is down 7.5%. The U.S. economy is doing okay. But around the world, most major economies are suffering.
Years of negative economic data and an overvalued stock market appear to have caught the Federal Reserve off guard.
Federal Reserve Boosts Silver Prices
Back in December, the Fed made it clear it was in no rush to raise rates; slow and steady was the Fed’s mantra. Most took that to mean four more modest increases in 2016, finishing out the year at 1.37%. And the same thing was to happen in 2017, finishing the year at 2.37%.
After stocks experienced their worst start to a year ever, the Fed finally acknowledged the U.S. economy is losing momentum. This was not received well on Wall Street. The Dow and S&P 500 both dropped after the announcement. (Source: “Federal Reserve Minutes,” Federal Reserve web site, January 28, 2016.)
Not surprisingly, the Fed also said it was not in a position to raise its key interest rate. Janet Yellen didn’t say it was going to change its plans to raise rates at least four times in 2016. But with the way things are, it’s looking less likely.
Ongoing market volatility and the absence of a rate increase helped lift silver prices, buoyed most recently by the Fed’s trepidation.
Since the beginning of 2016, silver prices have climbed 5.1% to nearly $14.50 an ounce. The short-term momentum could help lift silver prices to $15.00. That may not sound like much, but a near-term target of $15.00 represents a 50% correction from the October 2015 high of $16.15.
No. 1 Reason to Like Silver Here
January is just the beginning of the year; silver bulls can’t hang their optimism on one solid month. Fear not, though. The Fed has given silver bulls a reason to be bullish, noting, it is “monitoring global economic and financial developments.”
That’s good news for those who have actually been paying attention to the global economy. China’s economy is grinding down. The eurozone, Japan, and the BRICS nations are not exactly pulling their weight, either. With the U.S. economy hardly running on all cylinders, consumer spending cannot lift the world out of its economic slumber.
The International Monetary Fund (IMF) revised its growth forecasts lower for the global economy to just 3.4% in 2016 and 3.6% in 2017. It also reduced its outlook for the U.S, to expand this year and next at 2.6%, compared to earlier projections of 2.8% for both years. (Source: “Subdued Demand, Diminished Prospects,” International Monetary Fund web site, January 19, 2016.)
The World Bank echoed these weak sentiments. It cut its global growth outlook for 2016 to 2.9% from its June 2015 projection of 3.3%. More specifically, the U.S. economy is forecast to expand 2.7% this year, 2.4% in 2016, and just 2.2% in 2018. (Source: “Global Economic Prospects,” World Bank web site, January 6, 2016.)
Elsewhere, the eurozone is only expected to advance 1.7% in 2016 and 2017. Analysts expect U.K. gross domestic product (GDP) growth to grow at just 2.4% this year and 2.2% in 2017. Japanese GDP will rise an abysmal 1.3% this year and fall to 0.9% growth in 2017.
On top of that, the biggest emerging markets (Brazil, Russia, China, and South Africa) are slowing. This could spill over and crimp the global economy.
All this will give extra weight to the Federal Reserve’s interest rate decisions in 2016, especially given that a third of the S&P 500 companies get at least some of their revenue from overseas.
It should also give silver bulls a reason to cheer in 2016.