Precious Metals Plunge Post-Fed

December 15th, 2016 by

In the aftermath of yesterday’s rate hike by the Federal Reserve, a fresh dollar rally is pushing the precious metals to new lows. Spot gold is down over 1% to just a shade below $1,130/oz, its lowest in over ten months. Meantime, the silver price plummeted to levels not seen since early June, off almost 5% to just above $16/oz.

Dollar Jumps, Bonds Fall

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Yellen talks rate hikes –> dollar rallies –> gold falls

As expected, the FOMC resolved to bump its key interest rate by 25 basis points on Wednesday, moving the target range to 0.50% to 0.75%. Even though this came as little surprise, U.S. stocks ended the session on a volatile note. The rate hike did spark another rally for the dollar, which soared to a 14-year high. This stopped the recent rally in crude oil prices in its tracks. Futures for WTI crude also took a dive, threatening to fall below $50 per barrel.

Perhaps more significantly, the Fed committee indicated that it expects to increase rates three more times in 2017. This would certainly be a swifter tightening of monetary policy than the lone 0.25% rate increases we’ve seen the past two years. Keep in mind, however, that the FOMC and Fed Chair Janet Yellen had forecast four rate hikes in 2016 before the year began—and ended with only one.

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The dollar is dominating the yen and euro

The DXY index rallied better than 1% on Thursday morning, approaching 103. The greenback traded at its highest against the Japanese yen (JPY/USD) since February, while it was also strongest against the euro (USD/EUR) since 2003.

At the same time, so much money fled out of the Treasury market that one could almost hear a whooshing sound. Yesterday, the yield on the 10-year Treasury note jumped 10 basis points to 2.57%, and has risen another 2 bp this morning. The 10-year yield hasn’t been this high since September 2014. Similarly, the 2-year T-note yield was up to 1.26%.

Rosy Numbers

The financial news cycle for Wednesday and Thursday were also chock full of positive economic data being released in the U.S.

The current inflation rate was clocked at 1.7% in the latest data from the Labor Department, while the widely-accepted measure of inflation, the Consumer Price Index (CPI), was 0.2% higher month-over-month. So far this year, the CPI is up 2.1%.

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In addition, the key Philadelphia Fed manufacturing index showed its highest reading in more than a year. The index registered at 21.5; a reading above 0 represents an expansion of activity. The December survey of the region’s manufacturing activity rebounded from a somewhat sluggish November (7.6). Projections had called for only 9.1 this month.

On Thursday morning, the Labor Department also announced that last week’s jobless claims fell by 4,000 to just 254,000 new claims. As long as the encouraging economic numbers continue to roll in, greater risk-on sentiment in the U.S. markets and a steepening forecast of rate hikes from the Federal Reserve should be expected to weigh on the precious metal prices.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.