Gold and Silver Prices Rally as U.S. Federal Reserve Adopts Less Hawkish Stance and USDX Weakens

On March 22, the Federal Reserve once again increased interest rates, though only by 25 basis points this time, displaying a less hawkish stance following the events of March 10. After a period of aggressive 50-point interest rate hikes, one of the largest banking institutions in the United States, SVB Financial, collapsed, leading many to believe that the Federal Reserve took it too far, with the high-interest rates leading to an overcorrection. The most recent 25-basis point increase immediately spiked both silver and gold prices to $23.30 and $1,996.90, respectively, while the U.S. dollar continued to weaken.

The interest rate hikes were not a surprise to most market analysts following the Federal Open Market Committee Statement explaining “some additional policy firming.” While this slightly less aggressive interest rate hike may have temporarily improved U.S. stock indexes, the win was short-lived. Later in the session on March 22, U.S. Treasury Secretary Yellen announced during a Senate hearing that the federal government does not plan to protect bank deposits in non-FDIC-insured institutions.

After the collapse of SVB Financial, many investors were looking for a reason to not feel afraid. The current market conditions of March 2023 feels a tad bit too similar to the 2008 Great Recession, and people want a level of reassurance that another bank run won’t happen. Unfortunately, the Federal Reserve cannot provide this, which only adds fuel to the fire.

More uncertainty means more safe-haven investing. Following all of March’s events, the only steady denominators in an unbalanced economy are precious metals. Precious metals continue rising as more investors pull their funds out of risky asset classes and into something more secure, like gold and silver.

Nearing the end of March, the U.S. dollar index reached a seven-week low, while gold continued uptrending on a daily basis. The two prices nearly always work inversely to each other. As the U.S. dollar becomes weaker, investors use gold to hedge against inflation and protect their purchase power.

DXY fell to 102.065 from its 103.265 high and U.S. 2-year treasury yields dropped to 4.77%. Conversely, on March 23, spot gold prices reached $2,013.30 per ounce, the highest level since early 2022. Silver futures reached a seven-week high with steep daily uptrends bringing the closing price near the $24-per-ounce line.

Average forecasts from analysts show 2023 closing at an interest rate of 5.1%, though the Federal Reserve keeps changing its forecasts. According to Jerome Powell, a chairman of the Federal Reserve, “if we need to raise rates higher we will, for now we see the likelihood of credit tightening.”

“Two weeks ago, the market was leaning toward a 50 bp hike with Chair Powell having opened the door to a larger move if the totality of incoming data warranted it. One week ago, there were doubts that the Fed would raise rates at all amid turmoil in the banking sector. The market finally coalesced around a 25 bp increase, though there were some odds and several calls for the Fed to take a pass,” analysts from RBC economics explain.

While most analysts expected further Federal Reserve actions, many believe the government should’ve taken more time and consideration to assess the market conditions and damage following the first round of interest rate hikes. Predicting how people will continue responding to the first banking institution’s collapse is not a simple task that should be taken lightly. Many analysts think the Fed should’ve waited around six weeks before taking further action to prevent risking more impacts on the banking sector.

Luckily, the Federal Reserve did not come back too strong with another 50-point hike. “Today’s dovish tone and guidance, at least, suggests policymakers are now more mindful of the risks of over-tightening. And if today’s hike isn’t the last, we’re getting very close to the terminal,” the analysts conclude.

Whether or not an end to Federal Reserve interest rate hikes is actually on the horizon is hard to say. In the meantime, we can predict further gold and silver price increases for the duration of 2023 as the economy remains unstable. “CTA trend followers are relatively under-positioned in silver markets, where a break above $24.00/oz would spark large-scale buying activity,” analysts from TD Securities explain.

Tavi Costa, a partner and portfolio manager at Crescat Capital, forecasts enormous gold performance improvements in the near future, stating that

“at least a triple in gold prices would be likely what’s going to happen.”

As always, investors should consult their financial advisors before making any portfolio decisions.

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