Silver prices have been in freefall recently, plunging to eight-month lows this week as bears continued to control the precious metals market ahead of the holidays.
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Looking forward, February silver futures declined 0.8% to settle at $15.86 a troy ounce, the lowest since April. The metal is down around 2% for the week, as market fundamentals reduced the appetite for silver and other traditional safe-haven investments. Silver is currently trading near oversold levels on the Relative Strength Index (RSI). The MACD, a closely watched barometer of momentum, also shows strong downward pressure.
Meanwhile, March gold futures have also declined for three consecutive days. Bullion was last seen trading at $1,131.70 a troy ounce, not far from its recent 11-month low. Activity has been quiet this week, with trading volumes levelling off as investors began disengaging from the market ahead of the holidays. Equities, currencies, precious metals and even government bonds have traded within a narrow range all week.
Silver prices have been getting crushed since the November 8 US presidential election, where Donald Trump emerged as the surprise winner. Traders have been nothing short of euphoric in the aftermath of Trump’s victory, with equities setting multiple record highs and the US dollar surging on expectations of faster inflation.
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This has spelled bad news for precious metals. Silver futures are down nearly 14% since the election, with losses intensifying following the Federal Reserve’s decision to raise interest rates on December 14 for only the second time in a decade.
The Fed’s decision, while not unexpected, came with a stronger dose of hawkishness than the market was anticipating. The US central bank now may raise interest rates three times next year, followed by an additional three hikes in 2018. That may bring the target for the federal funds rate back above the 3% long-term average.
Headwinds Show Warning Signs for Precious Metals
An environment of rising interest rates doesn’t bode well for silver and other precious metals, which are priced in the US dollar and do not pay interest to investors. Investors have been reminded repeatedly over the past week that gold and silver may diverge even further from the US dollar as the Fed tightens monetary policy.
The ICE US dollar index has been flying high for the past six weeks, having only recently touched a fresh 14-year peak. The dollar index set its most recent high on Tuesday, when it closed at 103.29. The dollar index fell below 93 in May amid signs of a slowing economic recovery. The picture has changed dramatically over the past several months.
The central bank’s view that the economy was gaining momentum was vindicated on Thursday after the Commerce Department revised its estimate of third quarter GDP to reflect annualized growth of 3.5%. That’s up markedly from the prior estimate of 3.2% and well ahead of preliminary data showing a 2.9% increase. It was also the biggest increase in two years.