Gold and Silver Fall on Dollar Strength and Hawkish Fed Policy

APMEX

9/23/2022 3:40:14 PM

Last week, gold and silver saw a slight divergence, as gold fell by about 2.1% while silver gained as much. This week, the pair followed a more similar trajectory with as precious metals bugs and investors in the broader market both focusing on Fed speak.

 Gold started the week at $1,665 an ounce while silver started trading at $19.39. Neither metal saw significant price movements ahead of or during the Fed’s two-day meeting, which was set to begin on Tuesday. The meeting would culminate in an address by Fed Chair Jerome Powell in which he would provide direction on interest rates and monetary policy in the wake of persistent record inflation. 

While bullion saw little price-movement, its frequent foes in Treasury yields and the dollar index both surged higher through Tuesday. On Tuesday, yields on the 10-year Treasury note touched an 11-year high of 3.6% while yields for the 2-year Treasury reached 15-year highs just below 4%. 

In the broader market, stocks struggled on both Tuesday and Wednesday, as Wall Street wondered how far the Fed would go with interest rates to combat inflation. As expected, Fed Chair Powell announced a third-straight rate increase of 0.75% on Wednesday, which lifted the Fed funds rate to a range of 3%-3.25%. 

In a more hawkish tone, Powell rattled markets by stating that “the chances of a soft landing are likely to diminish” amid a continual raising of rates. Powell also stated that the central bank is targeting a benchmark rate of approximately 4.4% by year’s end.

The Fed Chair acknowledged that labor market slowdowns and economic growth are likely but underscored an “unconditional” commitment to bringing headline inflation down from its current level above 8.3% to the target of 2%. Following Powell’s address, stocks plunged. The S&P 500 and Dow Jones Industrial Average shed over 1.7% while the Nasdaq Composite slid by 1.8%. 

Meanwhile, gold and silver jumped to their respective weekly highs of $1,687 and $19.87. However, both metals quickly corrected closer to their weekly averages of $1,667 and $19.38 before the end of trading on Wednesday. 

This trend continued into Thursday, as Treasury yields found fresh highs, and the dollar index touched highs not seen since 2002, near 111.52. It wasn’t the prospect of another 0.75% rate hike, which was widely expected, but rather the stated commitment of Fed officials to a raising of interest rates despite potential economic woes, that soured investor sentiment.

 This being so, equities suffered again on Thursday as Wall Street headed for a losing week. As this is written, is the Nasdaq Composite and S&P 500 are both looking at weekly losses of more than 4.2%, while the Dow Jones Industrial is 3.8% lower on the week.

 Prior to today, gold and silver both seemed to be holding their own despite record highs for both the dollar and bond yields. However, both would eventually succumb to fears of continual rate hikes, elevated yields, and dollar strength.

 Today, gold plummeted to two-year lows of $1,643, which is a weekly loss of 1.2%. Silver also fell and is hovering near $18.82, which is 2.9% lower for the week.