Is it safe to invest in precious metals amid an ever-hawkish Fed?

on Jul 19, 2022
  • Fed's hiking weighs on precious metals
  • Silver looks particularly weak
  • Industrial demand on hold amid an upcoming recession

Inflation rose to four decades highs in the United States, triggering a hawkish reaction from the Federal Reserve. The Fed frontloaded multiple rate hikes, lifting the funds rate from close to zero levels to more appropriate levels given the rise in the prices of goods and services.

But there is scope for more.

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While this week, all eyes are on the European Central Bank’s decision, next week, the market expects the Fed to raise the funds rate by another 75bp. Moreover, at some point, the market had priced in a 100bp rate hike from the Fed.

Therefore, a hawkish Fed will likely keep tightening until inflation cools. As such, precious metals, such as gold, silver, platinum, or palladium, will have a hard time bouncing from their lows.

One, in particular, has broken below an important technical level – silver.

Silver breaks below horizontal support

The price of silver dropped below $22, triggering some stops as the level acted as an important technical level. Now that it trades below, the horizontal channel’s projection indicates that silver may drop as low as $16 or even more.

What would be the reason for such a move? One, for instance, might be the upcoming US recession.

Industrial demand for silver to be affected by an upcoming US recession

While the investment demand for silver declined amid the ever-hawkish Fed, industrial demand for silver also weighs on the precious metal. The market is pricing a recession in the US in the next 12 months, so industrial demand is unlikely to be a reason for the price of sliver to bounce from the lows.

The shift to green energy and the worldwide steps in that direction will not benefit silver in the context of a recession in the United States. Therefore, the outlook remains bearish with a move below $16 as the Fed keeps hiking, and many fears that it will end up hiking in a recession.

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