Gold and silver perform poorly as the Fed continues tightening monetary policy to tame inflation.
Gold and silver prices have been heading downwards recently as the US Federal Reserve continues its quantitative tightening in a bid to rein in soaring inflation. Silver recently dipped below $20 per ounce, an important psychological support level for traders.
Fed’s Pivot to Quantitative Tightening Policies Impacts Gold and Silver
Quantitative tightening (QT) is a monetary policy applied by central banks that reduces the level of money supply in the economy in order to decrease the spending level and slow down the economy—a practice that can help tame inflation.
QT generally follows a period of quantitative easing (QE), when the Central Bank prints money and purchases assets to stimulate the economy.
In February 2020, prior to the Covid outbreak, the Fed had around $4.2 trillion worth of assets on its balance sheet. After 26 months of asset purchases to address the economic downturn and keep credit flowing, the Fed’s balance sheet surged to $8.9 trillion.
This represents an increase of $4.7 trillion, far exceeding the central bank’s $3.6 trillion in purchases after the 2008 financial crisis.
The Fed arguably managed to support the US economy with its QE, though it also resulted in a surge in prices. By the end of 2021, inflation was well above the Fed’s 2% target. And in May, inflation hit 8.6%, the fastest increase since December 1981.
To rein in inflation, the Fed has begun QT as well as steep rate rises. In mid-June, the central bank raised benchmark interest rates three-quarters of a percentage point and might proceed with another 0.75% raise at its next monetary meeting in July.
Naturally, the Fed’s tightening adversely affects financial markets. However, it is seen as a positive sign for the US dollar as it precedes periods of higher rates. Furthermore, as the Fed stops replacing maturing securities, the money supply will shrink, possibly pushing the USD higher.
Silver Falls Below $20/ounce
Gold and silver continue to perform poorly as the Fed’s chatter about rate hikes persists. The yellow metal edged lower for the second successive day on Tuesday, dropping back closer to the $1,800 mark in the early European session. As reported, the gold price has remained generally stable despite a lack of investors.
Meanwhile, silver has recently fallen below the psychologically important benchmark of $20 per troy ounce. This comes after the metal had crashed about 26% compared to its March highs at the beginning of the Russia-Ukraine conflict when most other precious metals including gold rallied.
Another reason behind silver’s poor price performance is the fact that its supply has recovered at a much faster rate than demand, according to a report by the London Bullion Market Association (LBMA). This was largely because major silver-producing countries like Peru and Mexico lifted their COVID-19 restrictions much earlier than the rest of the world, leading to a surge in supply while demand was still low.
Nevertheless, silver is currently trading at $19.8 per troy ounce, down by more than 1%. Meanwhile, gold is currently trading at around $1,800 per ounce, down by merely 0.54%.