The U.S. Federal Reserve's two-day policy meeting starts tomorrow, so it's time to look at what impact a rate hike will have on silver prices.
To fully understand this, let's look at how silver prices are tied to rates.
How Silver Prices React to Fed Rate Hikes
Historically, silver prices have fallen right after a Fed rate hike.
When the Fed raises interest rates, the value of the U.S. dollar increases, which also makes dollar-denominated commodities more expensive. This makes buying silver less affordable, which lowers demand and sends silver prices down.
Higher rates also make investments that generate income more attractive than precious metals.
From 1974-1979, the real fed funds rate was below 2%. The Fed expected only temporary inflation from the 1973 oil crisis (note the real fed funds rate is the funds rate minus inflation). Then there was a huge spike in silver demand around 1980. When the real fed funds rate moved above 6% in 1980-1981, the price of silver fell from $50 an ounce to $10 an ounce.
This upcoming rate hike will be different.
The Fed is expected to raise rates by only a quarter of a percentage point, so this shouldn't put much negative pressure on silver prices.
"A rate increase of 0.25% in the fed funds rate has already been talked about for so long that it's mostly baked into prices now," said Money Morning Capital Wave Strategist Shah Gilani. "This won't be a market buster."
Right now the silver price is trading at $13.80 an ounce. In the near term, silver prices may decrease to $10 an ounce after the December rate hike, according to CME Group. For the long term, Money Morning Resource Investing Specialist Peter Krauth expects silver to remain a dependable store of wealth.
"Remember, silver is an industrial metal as well as a monetary metal," Krauth said. "At various points in time, it may tend to act more like one than the other. But as gold resumes its role as a store of wealth, I expect silver will not only tag along, it's likely to outperform."
Here's the best way to play silver prices right now.