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Gold, Silver Rally from Fed Rate Hike Delay

September 21, 2016 at 19:10 by Andrew Moran

Gold futures climbed on Wednesday after the Federal Reserve left interest rates unchanged. The yellow metal spiked immediately following the conclusion of the Federal Open Market Committee (FOMC) meeting.

December gold futures spiked $16.80, or 1.27%, to $1,335.00 per ounce at 18:40 GMT on Wednesday. Gold has not traded this high since September 9.

Silver is also rallying on the Fed news. December silver futures jumped $0.48, or 2.53%, to $19.76 an ounce. The last time silver futures were this high was on September 6.

The rally in gold and silver stemmed from the US central bank delaying a rate hike. According to a statement from the Fed, the target range for the federal funds rate was left unchanged at 0.25% to 0.50%. There were three dissenters: Kansas City Fed President Esther George, Cleveland Fed President Loretta Mester, and Boston Fed President Eric Rosengren. They wanted a rate hike of 25 basis points.

Here is a statement issued by the Fed:

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

It appears that the Fed will move ahead with a December rate hike.

Speaking at a press conference, Fed Chair Janet Yellen said that the move “does not reflect a lack of confidence in the economy.” Instead, Yellen told reporters, the Fed sees “scope for some further improvement in the labor market.”

Over the past several weeks, there has been a plethora of negative US economic data. The August jobs numbers were disappointing, retail sales figures declined, and manufacturing activity slipped into recession levels.

The Fed’s slow approach to raising rates is a benefit to gold. A low-rate environment heightens the yellow metal’s safe haven image. Also, investors become more attracted to gold since there are not many other investments in the market that can provide yield.

The next time the FOMC meets will be on Nov 1 and 2. The market does not expect a rate hike at that meeting. According to the CME Group FedWatch tool, there is a near 60% chance of an increase to interest rates at the December 13 and 14 meeting.

If you have any questions and comments on the commodities today, use the form below to reply.

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