Precious Metals

What’s behind March’s falling gold and silver prices?

The price of gold has been falling in March 2017 after two months of solid increases. What’s behind the change of direction?

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The first two weeks of March have not been kind to gold and silver spot prices.

Gold closed March 13 at $1,202.20 per ounce, down 4.3 percent from the $1,255.60 price where it closed Feb. 28. It had closed at a 2017 high of $1,257.20 on Feb. 27.

Meanwhile, silver has experienced a similar drop so far in March.

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One ounce of silver closed at $18.28 on Feb. 28. It closed up on March 2 at $18.33 before falling 7.1 percent, to $17.02 on March 13.

And gold and silver had been doing so well

The March drop comes after gold and silver were both on a tear during the first two months of 2017.

The silver spot price had risen to its 2017 high of $18.33 on March 2, from $15.74 on Dec. 23. That $2.59-per-ounce rise translates to a 16.5 percent increase.

Gold rose to its $1,257.20 high on Feb. 27 from around $1,131 on Dec. 22. That’s an approximately 11 percent rise.

So what is causing the sudden March drop?

A major announcement from Federal Reserve Chairman Janet Yellen might have something to do with it.

Federal Reserve expected to raise rates on March 15

Yellen is expected to announce on March 15 a 25-basis-point increase in the federal funds rate, which is the rate one bank can charge another bank for the short-term loans a bank might need to end the day with enough capital to cover all their lending to customers. 

It would be the first of three federal funds rate hikes expected in 2017, according to The New York Times.

Changes to the federal funds rate often gets passed along by banks to customers, in the form of fee rate hikes for customers borrowing from banks for car loans, credit cards, mortgages and the like. 

So the Federal Reserve typically implements increases to the federal funds rate only when confident that the wider economy can handle the wider effects.

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A raise to the federal funds rate also typically strengthens the dollar, according to Reuters, and since precious metals investments are often made as hedges against potential weakening of the dollar and the U.S. economy, it could very well be that gold and silver spot prices are being directly affected in March by the lead-up to the anticipated federal funds rate hike. 

So will the precious metals price falls continue?

Of course, no one can say with certainty if and how quickly gold and silver prices will stabilize or begin rising again. However, several current events, mostly in Europe, are likely to continue pushing investors toward the safe-haven investments.

In addition to continued uncertainty in the United States about how President Donald Trump’s policies will affect the U.S. economy in the long term, Reuters reports the divisive elections in the Netherlands and France, where far-right candidates are polling strong, a potential second Scottish independence referendum, and the upcoming start of the official Brexit negotiations, are all potentail gold and silver boosters.

Even the Federal Reserve rate hike may not keep the prices down long.

“Typically, once we get the reality of the rise, the dollar starts to ease off a little and gold tends to recover, and that’s exactly what we’re expecting this time,” George Milling-Stanley, head of Gold Strategy at State Street Global Advisors, was quoted by Reuters as saying.

Why people invest in gold and silver

Investing in gold and silver has historically been viewed as a hedge against the unpredictability of the overall economy, and in turn, a safe haven when other markets experience a downturn. 

Gold is valuable. That is based on the fact that we know there’s not a lot of it, and we know it is appealing to people. So while the health of someone’s investments in the stock market is subject to the performance of the companies invested in, gold is a known commodity with a value that, while it does fluctuate over time, generally does not fluctuate with the suddenness that a company’s stock can.

While still a hard asset that can serve as a hedge, silver is much less valuable than gold and its price is more prone to relatively large swings in the percentage of its value, up and down.

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