The big news last week was a tightening of monetary policy by two of the world’s leading central banks. The Fed raised interest rates again and the European Central Bank committed to hiking them next summer. True to its status as the ultimate contrarian investment, silver prevailed amid market conditions unfavorable to precious metals. Whether the rally was propelled by an economy on the verge of crash or building technical signals, the silver spot price trended upward throughout the week.
Silver Price Movement Indicators:
Monday, June 11, 2018
Gold Silver Ratio
After weeks of analysts predicting a silver price rally (read: silver price forecast) once the historically high gold silver ratio reversed course, the ratio narrowed from the April high or 82.5 to 77 on Monday.[1] The consensus across the industry was that prices for the white metal are on their way up. “[The] plunging GTSR is actually an extremely bullish indicator for the entire precious metals complex,” said Michael J. Ballanger of Streetwise Reports.
Silver’s performance proved the market buzz was more than hype, with prices hitting a seven-week high of $16.95 in early Monday trading.[2]
Tuesday, June 12, 2018
Inflation
Inflation was top of mind for Fed members and market participants alike on Tuesday in the lead up to the Federal Open Market Committee’s Wednesday interest rate meeting. While the Fed and mainstream media have been downplaying the inflation situation, examining the economic data reveals that it is rising.
Prices for many commodities are up:
- Crude oil: 40 percent.
- Wheat: 21 percent.
- Cotton: 15 percent.
- Wool: 27 percent.
- Copper: 20 percent.
- Coal: 39 percent.[3]
At the same time, prices for consumer goods have been increasing—and wages are failing to keep pace. Inflation reached the FOMC’s target of 2 percent last March, and many analysts are predicting it will go higher. Since inflation erodes the purchasing power of the dollar, it is a bullish scenario for precious metals, which have proven to weather economic storms and maintain their value for centuries.
Tuesday morning saw a strong start for silver, with prices reaching their high of $16.90 at 11 am but pulling back by the session close to $16.79. Market commentary focused on the psychologically important $17 threshold. ‘If the price were to exceed the $17 mark, this could lure in further buyers and continue the price rise,’ asserted Commerzbank analysts.
Wednesday, June 13, 2018
Interest Rate Hike
Wednesday brought the much anticipated FOMC meeting. As predicted, the Fed raised interest rates to a range of 1.75 percent to 2 percent. Data suggesting the economy is thriving and will continue to grow through 2020 motivated the Fed to plan for an additional rate hike this year, bringing the total up to four from three. The central bank expects U.S. GDP to increase 2.8 percent this year, 2.4 percent in 2019, and 2 percent in 2020. On the Fed’s current trajectory, interest rates will climb to 3.4 percent in the next two years.[4]
Usually, higher interest rates dull the luster of precious metals because they don’t offer a yield like government bonds. However, that wasn’t the case for silver on Wednesday: the white metal burst through the psychologically important $17 threshold to $17.04 at 4 pm. Perhaps investors are more concerned about the economic undercurrents of the recent interest rate hike than the rather insignificant yields they could bring: rising inflation and an overheating economy. Add the impact higher rates will have on the nation’s astronomical levels of personal and private debt and the economic picture becomes is even more troubling.
Thursday, June 14, 2018
Tightening Global Monetary Policy
On Thursday, the European Central Bank’s Governing Council met to decide on the direction of monetary policy for the E.U. Policymakers with the ECB announced plans to end quantitative easing at the finish of 2018 and to keep interest rates at zero percent through the summer of 2019. Although the ECB added the caveat that its plans are ‘subject to incoming data,’ the move signals a global tightening of monetary policy in response to stronger economies.
While on the face of it, the situation appears bearish for precious metals, a closer look at the factors driving central bank policy reveals it’s never been a more crucial time for investors to protect their wealth with safe havens like silver and gold (Learn how to buy in gold and silver). Economists are forecasting a global economic slowdown by 2019, “and ‘over the last 20 years it has been recession that’s been good for the gold price, not inflation,’” argued Matthew Turner, a precious metals analyst at Australian bank Macquarie.
What’s good for gold is also usually a boon for silver. The white metal mounted a two-month peak of $17.26 at 11 am.[5]
Friday, June 15, 2018
Technical Analysis
‘Momentum indicators are positive and [we] remain bullish on silver, targeting the $17.50 level,’ wrote analysts at the bullion bank Scotia Mocatta in a technical note. Societe Generale also sees silver trending upward should prices rise to $18.67, which would confirm the formation of a massive Inverted Head and Shoulder pattern in the market.[6] An H&S chart formation is used to predict a bullish-to-bearish trend reversal. Among technical analysts, the pattern is held as one of the most reliable predictors of a trend reversal.[7]
The price of silver held its ground on Friday, with the high of $17.18 recorded at 8 am.