Precious Metals Decouple from the Fed

by Lear Capital EditorialMarch 02, 2017

Janet Yellen Suggests Small Rate Hike
Just recently, precious metals experienced a modest dip on hints from Janet Yellen that a small interest rate hike could happen in March. She indicated that further monetary accommodation would be unwise and would necessitate rapid increases at some point if they are not raised gradually starting very soon.

Interest Rates Not Driving Metals Down, Look at the Dwindling Surplus 
It was almost as if the markets knee-jerked on this and sent gold and silver slightly lower just automatically. Prices recovered very quickly, however, causing much head scratching amongst the commodities watchers. If rate hikes are coming, why are precious metals performing well – they asked. The reality is rate hikes are only one piece of the precious metals puzzle, and it is not even the biggest piece. According to our featured chart, a massive silver deficit is in the forecast where there has historically been a surplus.

Precious metals have decoupled from Federal Reserve actions lately, to the consternation of Fed watchers. But silver especially is a likely win-win buy right now no matter what course of action the Fed takes. Why?

In the unlikely event that the Fed hikes rates twice this year and the economy continues to improve, silver will still be a strong investment. Increased infrastructure needs, greater demand for electronics, solar panels, and medical uses all require more silver. If the economy begins to tank, safe haven buyers will want silver as a hedge for their portfolios.

But perhaps the biggest piece of the puzzle is the giant elephant in the room:


We are entering a new era of silver scarcity. Historically, there has been plenty in the ground to go around. That is changing in a massive way. Our 2 billion ounce surplus per 1999 is about to become a 700 million silver DEFICIT in less than a decade. All while the supply tightens in ways we have never seen before.

So, while a 25 basis point interest rate hike from the Federal Reserve is not really a game changer in the investment world, this developing scarcity dynamic for silver very well might be.

Prices are still low, and that’s when smart investors buy. Don’t miss today’s opportunities in precious metals. 

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