Dovish Comments and Gold
Believe it or not, but gold has ornithological preferences. The yellow metal loves doves but hates hawks. Gold is a non-interest bearing asset, so lower interest rates make it more attractive compared to other assets. Gold is also believed to be an inflation hedge, so dovish monetary policy, which is more ready to accept inflation, could spur demand for the yellow metal.
Hence, dovish signals are usually refreshing for the yellow metal. The example may be Yellen’s dovish speech delivered in June 2016 at the World Affairs Council of Philadelphia shortly after the terrible May 2016 non-farm payrolls. Her remarks weakened the U.S. dollar and strengthened gold prices.
Chart 1: Gold prices in 2016 (London P.M. Fix, in $).
Dovish Comments and Silver
Silver is similar in the sympathy for doves. Just like gold, the white metal doesn’t bear any interest, so it prefers an environment of low real interest rates. Thanks to its unique properties and high correlation with gold, silver is also considered to be an inflation hedge.
Silver, thus, shines the brightest after the Fed’s dovish comments and plunges into despair after hawkish signals. Again, Yellen’s dovish speech delivered in June 2016 triggered a rally in silver prices, as the chart below shows.
Chart 2: Silver prices in 2016 (London Fix, in $).
Conclusions
Dovish comments about the monetary policy are generally positive for the precious metals. However, the relationship doesn’t always hold. Gold and silver don’t always rally after dovish comments from the Fed, especially if there are bearish factors at play.
Another problem is with the interpretation of the Fed’s signals. Central bankers don’t speak English, but they use newspeak, often sending contradictory signals. Precious metals traders may thus differ in their interpretation of the comments.
Expectations are also very important. Precious metals only react if the Fed’s communication is more dovish or less dovish than expected. What really matters is not reality, but how real events deviate from expectations. And very often the strategy “buy the rumor, sell the fact” works very well – gold and silver respond well to the dovish comments, but they struggle after dovish actions.
We encourage you to learn more about the gold market – not only about the impact of dovish comments on precious metals, but also how to successfully use gold as an investment and how to profitably trade it. A great way to start is to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today.
