Fed-Inspired Volatility a Silver Lining for Precious Metals?
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.