Gold and Silver Outlook for February 13-17

Gold and silver continued their upward trend as the growing concerns over how the Trump administration is shaping up are starting to raise the unrest in the markets. The talks over fiscal policy, trade policy and border adjustment tax, just to name a few, are sending mixed signals as to where the U.S. economy is heading and keeping markets guessing. This could explain the rise in volatility of gold and silver. This week the political stories that will unfold are expected to keep testing markets. But it won’t be an all Trump week: Other events to take notice include Yellen’s testimony, ECB minutes, U.S. CPI and retail sales.     

The talk over monetary policy is likely to make a comeback this week as Chair of the FOMC Yellen will testify before Congress on Tuesday and Wednesday (although the one of Tuesday will be more important for markets). The main change from the last time Yellen talked was that we have had another few data points about the state of the U.S. economy most notably the NFP report. The markets will try to assess if Yellen is leaning towards further normalization and raise rates several times. I suspect the markets, yet again, will be disappointed and Yellen will keep her cards close the vest without saying anything new that we haven’t heard so far with the phrase “data dependent” being reiterated several times. If Yellen were to disappoint markets, then her testimony won’t move markets much; this means the markets will continue to rely on the developments in U.S. politics.

It’s worth noting that the last NFP report shows strong growth in jobs and slower gain in wages, which indicates there is some more room to let the labor market run especially considering inflation has yet to breach the 2% level (at least not the core PCE rate that is followed by the FOMC). Speaking of inflation, this week the CPI report will be released and is expected to show another gain of 0.3% and 0.2% for CPI and core CPI, respectively. Retail sales report will be published on Wednesday.

Last week gold and silver gained a bit momentum and completed a two week rally. The rise in the uncertainty in the markets has helped boost demand for both precious metals, even though the dollar gained back some strength. After LT yields have picked up by the end of 2016 following the elections results and promises of fiscal stimulus and the Fed’s rate hike, yields have slowly been coming back down – this reversal has also helped push up bullion prices.

As of the end of last week, based on the implied probability, the estimated chance of a hike by June is nearly unchanged at 67%; by December the chances of at least two hiked are 69%.

What’s next?

As long as there is unease in the markets over what the Trump administration will do, this is likely to be net positive for gold and silver in the short run. And note that there were talks over the weekend that Trump may rollback from his infrastructure spending, which could actually devalue the USD and cut yields – a trend that is also net positive for PM. Conversely, if the uncertainty eases down or if Yellen were to deliver a testimony that is perceived by the markets as hawkish; these events could pressure down bullion prices in the short term.

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