Rising Rates and the Threat of War: Where Will Gold and Silver Go?

Gold and silver moved up on September 25 after the war of words on the weekend between North Korea and the United States worsened. The fallout continued after Donald Trump gave a heated speech at the United Nations, in which he tore into North Korea and threatened to topple the government if the U.S. was threatened. North Korea responded with its own harsh rhetoric and, referring to a later Trump tweet, stated that the U.S. had issued a “declaration of war.”

The ongoing tensions have propelled gold and silver for much of the summer, along with a U.S. dollar, which has lost strength throughout much of 2017. But a rate decision from the U.S. Federal Reserve could bring about an even bigger shock to precious metals prices.

On September 22, several Federal Reserve officials made comments indicating that an interest rate hike was still on the table before 2017 came to an end. This is in spite of lower-than-expected job growth and benign inflationary conditions.

A rate hike from the Federal Reserve could give the U.S. dollar a big boost heading into 2017. The September 24 German election, which saw the establishment damaged by yet another populist party, pushed the euro down in relation to the U.S. dollar.

Toronto-based Barrick Gold Corp. (TSX: ABX)(NYSE: ABX) climbed 1.73% on September 25. B2Gold Corp. (TSX: BTO)(NYSE:BTG) was up 8.87% on rising prices and on news that the company had completed the construction of its Fekola mill and began ore processing.

Silver miners Silvercorp Metals Inc. (TSX: SVM)(NYSE:SVM) and First Majestic Silver Corp. (TSX:FR)(NYSE: AG) were down 0.28% and up 2.38%, respectively.

The Federal Reserve policy decision should come at its December meeting. As it stands, 12 out of 16 officials believe that a rate hike will be on the table in December. This is, of course, subject to change depending on forthcoming economic information and the performance of the stock market.

Chicago Federal Reserve president Charles Evans believes that rate hikes should rise very gradually, reaching about 2.7% after two years. However, Evans also voiced concerns about the 1.4% inflation rate and said that he wanted to see a move towards the 2% goal along with rising wages. Janet Yellen pointed to reduction in cell phone plan costs as a reason for low inflation. A speech by Lael Brainard cited concerns that inflation had remained low “despite a sharp improvement in resource utilization.”

In any case, the statements from the Federal Reserve indicate that gradually raising interest rates above pre-2008 levels will be an active debate. Gold and silver prices could gain from this uncertainty as well as concerns mounting over one of the longest bull markets in history.

The longer that North Korea and the U.S. trade words, the more concerned investors will become, driving them to safe havens. However, I continue to believe that an actual military conflict is extremely unlikely. Still, the rhetoric will drive gold and silver up, as any long-term settlement between the two countries appears as remote as ever.