Despite the range bound of U.S. long term treasuries – e.g. 10 year bond yield has been trading mostly around 2.4-2.5 for the past couple of months – gold and silver have gained some momentum and are up by 7.6% and 12.9% YTD. Moreover, market sentiment has been mostly at a risk on mode, which enabled U.S. equities to reach new highs this year. So what’s going on with precious metals?
The way I see it, the markets could still be trying to assess if there are reasons for concerns over the direction of the U.S. economy. Further, there is a risk-off mode in other parts of the world including Europe where political unease is playing a key role with the elections of France, Netherlands and Germany and the fallout from the Brexit move. So even though U.S. yields haven’t changed much in recent months, the same can’t be said of EU yields.
The rally in equities haven’t deterred bullion bugs because there are investors who think the Trump trade won’t last long and there could be a bear market right around the corner once the budget for the fiscal year will be submitted and it will become more apparent the magnitude of the fiscal stimulus in the form of tax cuts and infrastructure spending. Once the budget hits the fan gold and silver could gain from this fallout. In the meantime, the rise in inflation expectations may have also played a secondary role (if at all) in persuading investors to pick up some precious metals.
This week, investors will continue to follow the political story — in both EU and U.S. — and see how it could impact the direction of markets. The Fed will also take center stage this week as the minutes of the last FOMC meeting will be out on Wednesday. Don’t expect any clear message from the Fed, it will mostly depend of market interpretation of the minutes: A more hawkish tone could push up the chances of a hike in March and curb down gold and silver.
As of last week, based on the implied probability, the estimated chance of a hike by June is nearly unchanged at 69%; for December the odds of at least two hiked are slightly up to 74%.
The markets are still trying to figure out if there is reason for concern over the political climate in the U.S. For now, equities in the U.S. continue to gain momentum as investors remain optimistic regarding a possible fiscal stimulus and higher earnings. But the Fed could still play a role in damping this mode by raising rates too early and too fast. Gold and silver are likely to follow the risk-on/risk-off mode that keeps shifting, so far, nearly on a weekly basis.
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