The recent debacle of the GOP over its attempt to pass healthcare legislation (repeal and replace the ACA) has put into question, at least for some market participants, whether other legislations will pass – including tax reform. This shift help drive down long term yields, reduce the chances of future hikes by the Fed, devalue the USD and drive up gold and silver prices. But is this recent rally short lived?
The markets seem to be at a crossroads as market participates try to determine whether the Trump administration will mount to successfully passing legislation and for the stock market it will more importantly mean corporate tax reform. But for the Federal Reserve any legislation that will stimulate the economy – regardless of how low its multipliers are – will lead FOMC members to raise rates at a faster pace. For gold and silver any hiccups in passing fiscal stimulus (tax cuts or infrastructure spending) is likely to help boost the demand for bullion. The recent weakness in the USD is also one of the main factors that provided backwind for the latest rally of gold and silver. But for now, let’s not forget that the markets are still pricing in at least another more hike by the Fed and perhaps even two more this year: the implied probability for a June hike is 48.5% as of Monday; and a December hike is at 88% and a total of three hikes by then at 54%.
So the expected higher interest rates should raise long term yields, which will eventually push back down gold and silver prices.
And this week we will get two major economic data points that could affect the markets’ outlook about the chances of future hikes by the Fed; these data points include: the GDP for Q4 (last estimate) and PCE report. The former isn’t expected to be much different from the last estimate (current expectations are at 2%); the PCE is another major report that is followed by the FOMC to estimate the US inflation.
The core PCE is projected to show a gain of 0.2% month over month – if the report shows a pickup in annual growth rate this could lead to some selloff of US treasuries and also curb back down gold and silver.
Bottom line
The recent rally of gold and silver was mostly driven by politics as the GOP didn’t pass its healthcare bill. The markets will pay closer attention to the prospects of the Trump administration passing tax reform. If the sentiment becomes more pessimistic about it, this could provide another short-term boost for gold and silver via the weaker dollar and lower LT interest rates. But this recent might be short lived if the economic data show signs of higher than expected growth.
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