How Would An Accelerated Fed Interest Rate Hike Cycle Impact Silver Wheaton?

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Wheaton Precious Metals

Gold prices declined nearly 3% on Tuesday, as positive U.S. manufacturing data stoked fears of an interest rate hike by the Fed.

Decline in Gold Prices 10-4-2016

(Source: Kitco)

The Institute for Supply Management’s (ISM) manufacturing index rose to 51.5 in September after dipping below 50 in August, beating market expectations (A value above 50 indicates expansion in manufacturing activity. [1] Since gold is considered a safe-haven asset from an investment point of view, improving economic conditions tend to reduce investor demand for gold. Moreover, rising interest rates tend to put pressure on gold prices since the yellow metal becomes a less attractive investment vis-a-vis interest bearing securities. Investors are keeping a close eye on U.S. macroeconomic data releases in order to guess when the Fed will next announce a rate hike. The timing and the pace of future Fed interest rate hikes will be contingent upon the pace of U.S. economic and jobs growth as well as the inflation rate. [2] U.S. GDP growth is expected to accelerate to 2.2% in 2017 from 1.6% this year. [3] However, if the pace of U.S. economic and jobs growth beats expectations, the Fed may accelerate its interest rate tightening cycle. Such a scenario would dampen the investment demand for gold, negatively impacting prices of the metal. A similar argument applies to prices of silver, which is also considered a safe-haven asset from an investment point of view. Expectations of lower silver and gold prices would negatively impact Silver Wheaton’s stock price.

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We have created a scenario using Trefis technology in order to model the impact of an accelerated Fed interest rate hike cycle on Silver Wheaton’s stock price. In the accelerated interest rate hike scenario, we have factored in a 5% decline in our silver and gold price forecasts by the end of our forecast period and a corresponding reduction in margins. Such a scenario would result in a 10% decline in our price estimate for Silver Wheaton. Given the implications for Silver Wheaton’s stock price, we will be keeping a keen eye on the trajectory of the Fed’s interest rate hike cycle.

See our complete analysis for this scenario for Silver Wheaton here

Have more questions about Silver Wheaton? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Silver Wheaton

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Notes:
  1. TREASURIES-Yields rise on strong U.S. manufacturing data, Reuters []
  2. Press Release, Federal Reserve Website []
  3. United States And The IMF, IMF []