Silver spot price: Is imminence of Fed tapering already priced in?

on Dec 11, 2013
Updated: Oct 21, 2019

**, Wednesday 11 December:**

The spot price of silver has rallied strongly so far this week, despite the assault from Fed talking heads supporting the case for QE taper this month and last Friday’s stronger-than-expected US labour market data. And those gains have extended today in the face of news that a bi-partisan budget deal was struck overnight UTC by Congressional negotiators in Washington DC.

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Although the agreement still has to get the nod from Congress, the co-operation between Democrats and Republicans – unprecedented in the modern era – has significantly reduced the prospects of another federal government shutdown next month. The protracted fiscal uncertainty in the US has been widely seen by market observers as one of the major factors in Federal Reserve hesitancy to trim stimulus. The budget deal thus removes “a hurdle” should the Fed be otherwise minded to introduce a December taper, in the view of Deutsche Bank’s chief US economist, Joseph LaVorgna.

The more or less constant threat of an end to US quantitative easing has routinely been held out as a culprit in silver’s poor performance this year. But despite the arguably greater likelihood of taper from next week, the precious metal has actually rallied today to a 3-week high of 20.475.

Some observers believe that the recent rise in gold and silver prices has been mainly due to technical buying and short-covering, but a growing number of pundits will have to start scratching their heads if imminent Fed tapering has already been priced in by the markets, as witness the ongoing gains in risk assets.
Goldman Sachs analyst Thomas Stopler concludes that the markets remains divided into two camps as regards the expected impact of Fed tapering. The first camp sees the prospects of pronounced US dollar strength, “believing that the Fed will likely not be able to prevent another sharp sell-off in bond yields”. The other camp has it that “tapering is ‘in the price’ already, and finds it difficult to see where the USD strength would come from”. Stopler himself leans towards that latter view, especially after the greenback’s negative response to Friday’s strong US employment data.

In their daily research note, analysts at Credit Agricole also consider a taper price-in, observing that “year-end positioning adjustment may also account for some of the moves”. The French bank emphasises that recent gains for precious metals and other risk assets “have taken place even in the face of comments by Fed officials including Bullard and Fisher which on balance supported the view of beginning tapering sooner rather than later.” Credit Agricole concludes that the markets may have become “increasingly accustomed to the idea of an imminent” reduction of stimulus.
The question remains open for now but meantime the spot price of silver is holding on to its recent gains.
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