The recent FOMC meeting ended, no surprise there, with no change in policy all awhile keeping the boat of from rocking. And even though the NFP report showed a higher than expected gain in jobs – 227K jobs compared to 170K jobs expected – the disappointing gain in wages – 2.5% growth YoY after a gain of 2.9% in the previous report– was key in reducing the chances of a Fed rate hike coming March. This could spark another short term rise in gold and silver prices. Looking forward, after a busy week with a lot of economic data this week will be more light, which means the focus of the market will shift back (even though it probably didn’t shift that much) to the political climate in the U.S.
Before looking toward this week it’s worth pointing out with respect to the latest NFP that the markets will keep putting more weight on the changes in wages rather than job growth (assuming there is no disastrous report) considering the FOMC is in a tightening cycle that could be even more rapid if the Trump administration were to pass fiscal stimulus or even just expand the budget deficit (by cutting taxes). As such, if the coming NFP reports show little growth in wages — i.e. remain around 2.5% — with no acceleration this could reduce again the chance of a hike in the near term – something that is also likely to further push up gold and silver prices. But if this recent report was just a one-off, and wages were to pick up again to a rate closer to 3%, this could spark again an outlook for a more hawkish Fed — which is likely to bring down precious metals prices. As of the end of last week, the markets, based on the implied probability, estimate the chance of a hike by June are 63%; by December the chances of at least two hiked the chances were 67%.
In terms of political climate, the markets are still trying to figure out what is next for the U.S. and what does it imply for gold and silver. Even though the yields of U.S. treasuries and the dollar are up from November, they have actually come down since the start of the year. This has helped drive back up gold and silver prices in 2017, up to date.
The volatility of gold has picked up since the U.S. elections as indicated in the chart below of the GARCH(1,1) of gold between 2015 and 2017.
Source: FRED and Author’s calculations
Despite the steady rise in volatility, it still hasn’t reached the high levels recorded back in June—after the Brexit vote – or in February – when equities tumbled.
Looking forward, the major news will be, yet again, how the markets will interpret what President Trump is trying to convey. In terms of economic data, this week is light on that: The consumer sentiment report will be released on Friday and is expected to slightly fall to 97.9 (98.5 in the previous report).
Gold and silver have had another week which was driven by the devaluation of the USD, drop in interest rates and the slow rise in the uncertainty in the markets. The political story will continue to take center stage and the markets will try to assess what kind of policies the Trump administration will roll out. This will include the talks over border adjustment tax, repealing the ACA and the repeal Dodd Frank three, out of many, issues that could impact the strength of the economic progress of the U.S. As long as the market remains uncertain about the policies that will be implemented and more doubts loom over the prospects of tax cuts and infrastructure spending these doubts are likely to boost the demand for gold and silver in the near term.
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