Once Again, a "What-If" Scenario for Precious Metals

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Part 5
Once Again, a "What-If" Scenario for Precious Metals PART 5 OF 6

Silver Could Follow Gold and Plunge if the Fed Raises the Rates

Silver waits for Fed

The Fed’s meetings in 2015 have been the core determinant of gold prices as well as silver. This is true even though silver is an industrial metal. As the Fed decides to raise the rate, the higher rates make the non-interest-bearing precious metals less appealing and cause them to retreat. The graph below shows the price reaction of silver after the Federal Reserve’s meeting in 2015.

Silver Could Follow Gold and Plunge if the Fed Raises the Rates

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Silver has plunged from its high of above $18 that it in January 2015 to almost $14 in November. The metal is currently trading at its multi-year lows as it waits for the Fed’s verdict.

Looming news

In case the Fed decides to move the interest rates by 25 basis point, it will have a worsening effect on silver prices. Most market participants expect the metal to plunge to multi-year fresh lows once the rates are hiked.

However, further looming news for investors is that the hike is already priced at the current level and may not result in further falls, especially if the Fed only raises the rates minutely, by 10 or 15 basis point. All eyes are now set on December 15 as that will precisely determine whether there is more room for the precious metal’s prices to fall or if industrial demands buoy it.

A small possibilty is that the Fed doesn’t change the rates, and so the prices of silver and also other commodities may rise. This case may be similar to when the ECB (European Central Bank) eased the interest rates but still hurt the expectations of the markets by a minimal ease. The result was that the euro gained instead of falling. In other words, the markets may have priced the easing, and so the euro rose.

The price of ETFs like the Global X Silver Miners ETF (SIL) and Proshares Ultra Silver (AGQ) may also depend on changes in silver. Mining companies like Pan American Silver (PAAS), First Majestic Silver (AG), and Silver Wheaton (SLW) also have their share prices determined majorly by silver.


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