Gold and silver had a very big day on Thursday, June 19 and a very big week as the precious metals break higher.
Janet Yellen’s post-FOMC press conference drove home the message that the Fed’s so-called “zero interest rate policy” (ZIRP) – wherein the federal funds rate is kept between 0 and 0.25 percent – would remain in effect longer than previously believed. This announcement came as quite a surprise to hedge fund managers who had short positions on gold and silver. In fact, just one week earlier, short positions on silver futures contracts had reached a record-high, $4.2 billion.
Dr. Yellen made a point of reversing the assumptions which arose after her March press conference, when she answered a question by speculating that the increases to the federal funds rate would begin six months after the completion of the Fed’s bond-buying program.
Those who did the math by combining that remark with the frequent assurances by FOMC member and Dallas Fed President Richard Fisher, that the Fed’s bond-buying program would end in October, were left with the conclusion that the first increase to the federal funds rate would take place in April of 2015. Nevertheless, those assumptions were negated when the FOMC Statement emphasized (twice) that there would be no federal funds rate increase for “a considerable time” after the bond-buying ends:
From the Federal Reserve statement:
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
At her post-meeting press conference, the Federal Reserve Chair clarified that there is no “mechanical formula” for determining what is meant by the term, “a considerable time”. In other words: forget about that “six months” thing.
The surprising news not only boosted enthusiasm about precious metals investments, it also put a tremendous squeeze on the short-sellers of gold and silver.
The weakening of the dollar which resulted from the Fed’s quantitative easing program had enhanced gold’s status as a “safe haven”, pushing gold prices to record highs during 2011. As a result, the phase-out of QE has been seen as a threat to gold prices.
To the surprise of many, throughout the first two months of 2014, gold prices proved rather resilient to the tapering of the of the Federal Reserve’s bond-buying program. In fact, the spot price of gold managed to rise more than 14 percent between New Year’s Eve and March 14. Nevertheless, much of the 2014 gain deteriorated during the second half of March, with the last week of May bringing another significant drop. Despite the gains made by gold during the week ending June 13, the 2014 advance was down to 5.95 percent by Friday’s closing bell.
In the wake of Wednesday’s FOMC decision, spot price of gold was up to a 9.60 percent advance for 2014, by Thursday’s closing bell on the CME. Also on Thursday, the spot price of silver jumped 4.27 percent to $20.75 per ounce on the CME. It was silver’s biggest advance since the 5.34 percent vault on Valentine’s Day. Share prices for gold and silver miners skyrocketed on Thursday.
At this point, those who missed out on the opportunity to rake-in those huge gains are wondering what might lie ahead for gold and silver. Eventually, the increases to the federal funds rate will begin. In the meantime, October will bring the end of the fed’s bond purchases. Beyond that, talk has already begun concerning the timetable and manner by which the Fed will unwind its balance sheet.
Over the shorter term, the rally could continue, since Thursday’s trading activity pushed the spot prices for both gold and silver above their 200-day moving averages (which were above the 50-day moving averages). In the case of silver, it was the first time that the spot price of the white metal closed above the 200-day line since March 17.
Gold had been experiencing overhead resistance at $1,300 per ounce since April 15. The fact that both metals have just broken above resistance could signal further acceleration.
Investors seeking to profit from increasing gold and/or silver prices may want to consider one or both of the following ETFs:
iShares Gold Trust ETF (IAU): This ETF reflects the current price and trends of Gold Bullion and offers exposure to the gold market within a brokerage account. The iShares Gold Trust ETF is backed by gold held in trusts located in London, Toronto, and New York.
The gold spot price for IAU is determined by the London Bullion Market Association.
iShares Silver Trust ETF (SLV): This ETF reflects the current price of silver and trends of Silver Bullion and offers exposure to the silver market within a brokerage account.
The iShares Silver Trust ETF is backed by real silver and the silver price is determined by the London Bullion Market Association.
Bottom line: Gold and silver are on the move, and these always volatile markets could offer opportunity for nimble investors.
All material herein is believed to be correct but its accuracy is not guaranteed. This article represents solely the opinions of John Nyaradi and readers are encouraged to consult their investment advisors prior to making any investment decisions. All information herein is for general informational purposes only. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations. There is risk of loss in all trading and readers are encouraged to read the full disclosure statement at http://www.wallstreetsectorselector.com/disclosure.html. None of the information in this article is intended to be investment advice or any kind or offer or solicitation to buy, sell or otherwise invest in any fund, company or security. Nothing herein represents a recommendation, claim, promise, guarantee or warranty regarding the suitability or profitability of any investment.