How the Fed Has Moved Silver Prices in 2014

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For all the discussions of inflation and labor market conditions going on at the U.S. Federal Reserve's policy meetings this year, it would be expected that the Fed's words would be felt in silver prices in 2014.

Fed has had marginal effect on silver prices in 2014Silver is a precious metal investment like gold, and when fears of inflation arise it attracts investor interest as an alternative investment to hedge against a weakening dollar. Gold is the premier precious metal, but when traders begin to pour into gold, silver will get residual investor interest.

And it will generally move more dramatically than gold, because trade volume is significantly smaller for silver than its sister metal.

"The silver market is tiny compared to the gold market," Richard Checkan, president and chief operating officer of Asset Strategies International told Money Morning. "It's like throwing a rock into a lake versus a puddle; the relative splash is much bigger in the puddle."

Silver's price moves this year highlight its volatility. It has gained as much as almost 5% in a single day, and lost as much as 3%.

With the Fed this year continually echoing the refrain that interest rates will remain low for a "considerable" period, the ground would seem fertile enough for huge gains in silver, given that a long period of accommodative monetary policy, such as a low interest rate environment, is more conducive to inflation.

But this year, that hasn't been the case...

Silver's Moves on FOMC Days

For being as volatile an asset as silver is, on days where the Fed occupies headlines - either through its Federal Open Market Committee (FOMC) meetings or the meeting minutes release that occurs three weeks later - the white metal has generally moved only very marginally.

Just check out the following chart of silver price moves on Fed news days...

As the chart shows, on average, FOMC events will push silver prices down 0.3%, or about $0.07. While there are more times the metal's price has climbed instead of slipped around the time of a Fed event, the losses have been bigger than the gains.

Silver prices saw their biggest price decline that can be attributed to Fed guidance on Feb. 19, the day that the central bank released minutes from its meeting in January. Prices dropped $0.425 an ounce, or 1.9%.

This was a sizable one-day drop, and was the tenth-largest decline on the year.

The release of the January meeting's minutes on Feb. 19 was significant in that it was the first time that the FOMC acknowledged that the 6.5% unemployment rate threshold guidance - which dictated that this unemployment figure was a signal that interest rates ought to rise from their near-zero level - should be revised. This was because the unemployment rate was at 6.6%, and the Fed was not willing to tighten monetary policy so quickly.

But the more likely culprit in silver's decline, if anything from the FOMC minutes, was the fact that instead of toeing the same line on a prolonged period of low interest rates, "a few participants raised the possibility that it might be appropriate to increase the federal funds rate relatively soon," according to the minutes. The prospect of an accelerated increase in interest rates would work to dampen inflation fears, and prompt investors to flee from silver.

The biggest single-day gain for silver on an FOMC-driven news day came on Jan. 29, the date of an actual FOMC meeting. Prices rose $0.15, or about 0.8%.

Compared to silver's biggest increases on the year, this was relatively small, and was the 34th-largest one-day gain in 2014. To put this in perspective, on silver's biggest day this year, Feb. 14, it jumped about 5% and gained $1.02.

The meeting of that day was pretty uneventful, and was only notable in that it was the last for former Fed Chairman Ben Bernanke.

Another noteworthy increase in silver came after the FOMC meeting on June 18. It was current Fed Chairwoman Janet Yellen's third meeting at the helm, and it came three months after she slipped up in a press conference and, knowingly or not, made a statement that seemed to indicate interest rates would spike quicker than expected. On that day in March, markets shook at the prospects of an accelerated rate hike.

But in June, when asked about the interest rate increases in a post-FOMC meeting press conference, she stayed mute, and continued to play by the Fed script of articulating a low-rate policy for a long time.

Her reticence on interest rates helped push silver up $0.14, and more importantly, helped sustain an unexpected silver rally where silver gained as much as 14.3%.

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