Fed-inspired volatility a silver lining for precious metals

May 20, 2016

Gold and silver prices have taken a big plunge on the back of falling bond prices and rallying US dollar since the release of the FOMC’s last policy meeting minutes on Wednesday and the accompanying hawkish commentary from several Fed officials. All of a sudden the implied probability of a June rate hike, which had been sub-10 per cent a few days ago, has now risen to almost 75 per cent. This basically has diminished the appetite for low and non-interest-baring assets like the euro and gold respectively.

But is the market overreacting to all this? After all, the FOMC was apparently less concerned about the economic impact of a rate rise because of a slightly weaker dollar, stronger equity markets and better financial conditions overall. But since the April meeting, the dollar had already appreciated a little and now that it has gained more noticeably and the stock markets have fallen, don’t be surprised if the Fed starts to talk down the prospects of a June rate hike in the coming weeks. Unfortunately, this is what the markets have been reduced to!

But as far as precious metals are concerned, it is not just the volatility in the dollar that impacts their prices. Certainly, the price of gold in euros has been able to hold its own relatively well although it too has weakened over the past two days. But should the stock markets fall further on rate rise concerns or on renewed anxieties over Britain potentially leaving the European Union then demand for safe haven assets could increase once again.

So just because they are down now, precious metals are by no means out. Indeed, this weakness in gold and silver prices could provide fresh opportunities for investors to pick up the metals at “cheaper” prices – especially with silver now testing a major support level as discussed below.

Technical outlook: Silver arrives at major support

As we reported the possibility earlier this week (in a report aptly-titled “Silver set for a sharp move, but which direction?”) the metal broke down below key short-term supports to drop to the key $16.15-$16.35 area today. As can be seen from the updated chart, below, this area marks the point of origin of the breakout from earlier this year. Once resistance, this area could now turn into support and lead to a rebound towards resistance at $16.75, $17.00 or potentially a lot higher over time.

However, if the selling pressure persists now and silver goes on to take out the abovementioned $16.15-16.35 range then a deeper correction could be on the way. In this potential scenario, silver’s next stop could be at the bullish trend line, the 61.8% Fibonacci retracement at $15.30 or even the 200-day moving average at $15.10/15 area.

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