Today it’s all about the Fed. Silver prices are moving higher in pre-FOMC action today as investors square positions ahead of the announcement and shorts cover some positions. In addition, renewed worries over emerging markets currencies are rattling markets this morning. Overnight, the central bank of Turkey raised its key lending rate by more than expected in order to try and stabilize the lira. In addition, the central bank of South Africa also raised its key lending rate to boost the rand. This follows up a move earlier in the week by the central bank of India. Thus far, the moves made by the central banks have had only a brief positive effect. Although markets are not in panic mode, and although things may be a little calmer, investors are paying very close attention to these developments. Emerging markets currency turmoil could keep a bid in gold and silver as investor seek out flight to safety instruments.
There is no clear consensus on what the Fed will do today, however many believe that the central bank will taper by another $10 billion per month. Chairman Bernanke will also hand over leadership of the central bank to Janet Yellen. Although it seemed just a few short weeks ago that tapering was completely baked into the cake, some are now second guessing that assessment and the combination of emerging markets stress along with the Fed taking its foot off the gas could spell trouble for stocks and risk assets. Should stocks continue to see selling pressure, gold and silver could stand to benefit as investors look for alternative places to put cash to work.
Silver and gold have thus far held up reasonably well given the Fed tapering and stock strength. Silver prices have been stuck in a trading range from about the $19 to $20.50 area for several weeks now. Thus far, the silver bulls have been unable to put together a sustainable rally to break out above resistance. Although silver may trade sideways for sometime, we feel it is unlikely. The market will at some point break out of its current trading range, and that breakout will likely determine the direction of silver prices for the near future. A breakdown could take silver prices to the previous low from last June just above the $18 level. Beyond that, the $17.30 area may act as support. An upside breakout could take silver prices to the $22 area very quickly, with the possibility of $25 silver not being too far-fetched.