Silver Climbs But Fed Rate Hike Looms

Silver closed higher up by $0.06 on Wednesday, closing to $17.81 an ounce. Silver has had an impressive year thus far, gaining approximately 11.65%. While this is very impressive there is something coming up that could really derail this rally. That item would be the Fed, which is set to meet in March. That is the meeting where the Fed will decide if it should raise interest rates or not. The good news is that silver may even go up on uncertainty. This involves the uncertainty revolving around the new President of the United States Donald Trump. Silver ETFS are highly stable and have been trading higher thanks to the upswing in silver itself.

Fed Rate Hike

The Fed is set to meet in March, and it is expected to discuss the next possible path of hiking U.S. interest rates. The reason why the Fed is moving to hike interest rates is because of the jobs market and the American economy stabilizing. The Fed has sought out to perform at least three rate hikes in 2017, and depending upon additional economic data this might be the case. The Federal Reserve Bank of Philadelphia President Patrick Harker was adamant that a rate hike was on the table. Again, it was reiterated that the Fed would only act if data supports it. The current rate is at 0.50%, and if all goes well the Fed would raise the rate to 0.75%. The Fed rate hike would be a huge negative for silver. That is because silver and other commodities become less attractive as an investment when interest rates are increased. This phenomenon occurs because the dollar gets stronger after a rate hike. The dollar is highly correlated with commodities. When the dollar goes up, commodities such as silver trade down and vice versa.

Big Change

Another thing that pushes traders to flock to silver as a trade would be uncertainty. Ever since Donald Trump was elected as President of the United States, he has been enacting a lot of executive orders. This had put a lot of traders on edge. Events such as these create uncertainty. In those instances, silver tends to edge higher in price as traders look for safe haven assets. What traders should watch for is how any additional executive orders affect the silver trade. It would also be wise to see if the Fed performs another rate hike in March, because that will affect the dollar. Which in turn will have a negative connotation on silver.

Industrial Demand

Silver is a unique asset compared to gold because it does not only act as a safe haven asset. Silver can also be used as a metal to produce different types of products. Industrial demand continues to remain strong for silver. This is especially true considering that throughout most of 2016 industrial demand for silver has continued to climb. Matter of fact, industrial silver makes up more than half of the silver market. That’s why it is imperative that industrial demand remain high, otherwise silver could fall to lower price levels. One of the perks of silver is that it tends to perform better when the economy is expanding. Other factors that could push silver higher would be both Japan and Europe pushing negative interest rates lower. Again, in that type of a move traders would invest in silver for protection of their portfolios.

Silver ETFs

Taking a look at a few silver ETFs it is easy to understand why silver has been rising so much. It also explains the rush to silver because of uncertainty, and a possible rate hike. The iShares Silver Trust ETF (SLV) and ETF Physical Silver shares have gained 9.7% year to date. The gain seen in both is much better than the gold ETF counterparts. Silver has done well this year, while gold has pulled back. That is because silver, unlike gold, carries a yield. It trades based off industrial demand, and that means that silver should continue to post better gains over gold this year. Of course, that could all change depending upon how the Fed acts with respect to interest rates. That’s why it is important for traders to keep an eye on the Fed’s next move.