A short, hooked bill, curved and sharp talons, and keen eyesight. Hawks. Magnificent animals.
You are probably wondering why we write about birds on a website devoted toand other investments. The reason is that “hawk” is a term used not only in ornithology, but also in . It means a policymaker who is predominantly concerned about . Hence, hawks generally favor higher and tight monetary policy to deter inflationary pressures. They constantly fight with the doves who are rather concerned about unemployment and prefer lower interest rates and easy monetary policy to support economic growth.
In this tug-of-war, thesometimes adopts a more hawkish or a more dovish tone. The former signals a more aggressive stance towards , while the latter indicates a preference towards easy monetary conditions.
Hawkish Comments and Gold
It may sound a bit strange, but gold has ornithological preferences. The yellow metal loves doves, but hates hawks. Gold is a non-interest bearing asset, so higher interest rates make it less attractive compared to interest-bearing assets. Gold is also believed to be an, so hawkish monetary policy implemented to keep inflation in check reduces the need to use gold for that purpose.
Hence, hawkish comments are generally deadly for gold, while dovish signals are invigorating for the yellow metal. The example may be the. The released statement from that meeting opened doors for an interest rate hike in December, which strengthened the U.S. dollar and sent gold prices south, as one can see in the chart below.
Chart 1: Gold prices in 2015 (London P.M. Fix, in $).
Hawkish Comments and Silver
Silver is similar in the antipathy to hawks and sympathy for the doves. Just like gold, the white metal doesn’t bear any interest, so it prefers an environment of low. Thanks to its and high , 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, the hawkish surprise in October 2015 triggered a freefall in silver prices, as one can see in the chart below.
Chart 2: Silver prices in 2015 (London Fix, in $).
In theory, hawkish comments about the monetary policy are negative for the precious metals. It is generally true, but reality is complex and that relationship doesn’t always hold. Gold and silver sometimes shrug off hawkish comments from the Fed, if there are present someat play.
Another problem is with the interpretation of the Fed’s signals. Central banks don’t speak English, but they use cloudy newspeak, often sending contradictory signals. Precious metals traders may thus differ in their interpretation of the comments – and gold prices may not react in line with expectations.
Apropos expectations: they are very important. Precious metals only react if the Fed’s communication is more hawkish or less hawkish than expected. What really matters is not reality, but how the real events deviate from expectations. And very often the strategy “buy the rumor, sell the fact” works very well – gold and silver respond badly to hawkish comments, but they flourish after hawkish actions.
We encourage you to learn more about the gold market – not only about the impact of hawkish comments on precious metals, but also how to successfully useand how to profitably trade it. A great way to start is to sign up for our . 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. .Back