Gold and silver prices have recently trended lower as the US Federal Reserve continues its quantitative tightening in an effort to rein in soaring inflation. Silver recently fell below $20 an ounce, an important psychological support level for traders.
The Fed’s Pivot to Quantitative Tightening Policies Affects 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 level of spending and slow down the economy, a practice that can help control the inflation.
QT usually follows a period of quantitative easing (QE), when the central bank prints money and buys assets to stimulate the economy.
In February 2020, before the Covid outbreak, the Fed had approximately $4.2 trillion in assets on its balance sheet. After 26 months of asset purchases to resolve the economic downturn and maintain credit, the Fed’s balance sheet has grown to $8.9 trillion.
This represents an increase of $4.7 trillion, far exceeding the Central Bank’s purchases of $3.6 trillion after the 2008 financial crisis.
The Fed has arguably succeeded in supporting the US economy with its QE, although this has also caused prices to spike. By the end of 2021, inflation was well above the Fed’s 2% target. And in May, inflation hit 8.6%, the fastest rise since December 1981.
To curb inflation, the Fed started a QT as well as sharp rate hikes. In mid-June, the central bank raised benchmark interest rates by three-quarters of a percentage point and may hike another 0.75% at its next monetary meeting in July.
Naturally, the tightening of the Fed negatively affects the financial markets. However, it is considered a positive sign for the US dollar as it precedes periods of higher rates. Additionally, as the Fed stops replacing maturing securities, the money supply will contract, possibly pushing the USD higher.
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Silver drops below $20/oz
Gold and silver continue to perform poorly as Fed talk of rate hikes persists. The yellow metal edged lower for the second successive day on Tuesday, closing in on the $1,800 mark in the early European session. As noted, the price of gold has remained generally stable despite the lack of investors.
Meanwhile, silver recently fell below the psychologically important benchmark of $20 per troy ounce. It comes after the metal tumbled about 26% from its March highs at the start of the Russia-Ukraine conflict, when most other precious metals, including gold, rallied.
Another reason for silver’s poor price performance is that its supply has recovered at a much faster rate than demand, according to a report from the London Bullion Market Association (LBMA). This is 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 an increase in supply as the demand was still weak.
Nonetheless, silver is currently trading at $19.8 per troy ounce, down more than 1%. Meanwhile, gold is currently trading around $1,800 an ounce, down just 0.54%.
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How do you think gold and silver will behave for the rest of the year? Let us know in the comments below.
About the Author
Ruholamin Haqshanas is an accomplished crypto and finance journalist with over two years of writing experience in the field. He has a solid understanding of various segments of the FinTech space, including the decentralized iteration of financial systems (DeFi) and the emerging non-fungible token (NFT) market. He is an active user of digital assets for remittances.