Wednesday March 18, 2015, 5:00pm PDT

By Charlotte McLeod+ - Exclusive to Gold Investing News

 

Case in point: the gold price dropped to a four-month low on Tuesday, hitting about $1,143.40 per ounce, while the price of silver fell about half a percent, hitting $15.51 per ounce. Meanwhile, platinum sank that day to $1,092 per ounce.

As mentioned, that price action was the result of a Fed meeting. Specifically, investors were concerned that the central bank would decide at the meeting to raise interest rates — analyst consensus was that the exclusion of the word “patient” in the central bank’s statement on interest rates would constitute a move closer to a rate hike.

 

Higher interest rates are a concern for those focused on the precious metals space because they indicate faith in the US economy. Put simply, when the US economy is strong the Fed is more likely to impose higher interest rates, while when it’s weak that is less likely. Precious metals, which are considered a safe-haven investment, are generally what investors turn to when the US economy is not doing well; conversely, when the opposite is true they are less likely to buy them up.

 

Ultimately, when the central bank’s statement was released midway through Wednesday afternoon, the word “patient” was omitted. Breaking down what that means, CBC News states that the upshot is that a rate increase could take place within the next few months. The Fed hasn’t been specific on exactly when it will happen, with Chair Janet Yellen simply stating, “[t]his change does not mean that an increase will necessarily occur in June, though the committee can’t rule that out.”

 

According to the Financial Post, rates have not been increased since 2006.

 

In the lead up to the Fed’s announcement, prices for gold and silver remained subdued, hovering around the levels seen Tuesday. Afterwards, however, was a different story. The gold price leapt to to $1,173.50 immediately following the news, and stayed around that level for the rest of the day, ultimately closing at $1,167.10. Bloomberg states that that’s the biggest rise the yellow metal has seen since January.

 

For its part, silver jumped up to $16.09, then closed at $15.91.

 

While it might seem counterintuitive that precious metals prices rose after the Fed indicated that a rate hike is coming, Mike Meyer, a vice president at EverBank Wealth Management, explained to Bloomberg that in fact it makes sense. “The focus is on inflation now, and since we have such prevailing low inflation rates, gold traders believe that the rate hike is not coming anytime soon,” he said, adding, “[p]eople are reading this as dovish for gold.”

 

Indeed, the Fed said that it will look at imposing higher interest rates when it is “reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

 

Whether precious metals prices will be able to maintain Wednesday’s gains remains to be seen. For now, however, they seem to be at least a little ways out of the woods.