The cool down in the U.S. equities and the weakness of the U.S. dollar against the leading currencies have provided the proper environment to slowly bring back up gold and silver. Will this slow recovery last? This week’s U.S. economic reports include CPI and new home sales; China’s third quarter GDP and industrial production will come out. In Europe, manufacturing PMI for EU and German Consumer Climate will be released. So let’s examine the economic outlook for the week of October 20th to 24th:
This week, the U.S. CPI will be released. The core CPI is projected to rise by 0.2% and the CPI to remain flat. I think the progress of the U.S inflation plays in different direction for bullion. If the core CPI keeps recovering, this may reignite the demand for precious metals as an investment against rising inflation. For now, however, the inflation is still low to make a sustainable recovery. Conversely, higher core CPI is also pushing a little bit further the FOMC towards pushing the button on raising rates, which is likely to impede the rally of gold and silver. Of these two opposing forces, I suspect the latter places a more substantial role in moving precious metals.
In any case next month’s CPI report, the CPI index is likely to fall compared to the previous month on account of falling oil prices.
Besides the progress in the U.S. inflation, the housing market will be produce data including new home sales, which provide an indication as to the changes in the demand for new homes. The progress in the U.S. housing market is another factor to consider regarding the health of the U.S. economy and as such could provide some additional input and indirectly impact the direction of the U.S. dollar and bullion prices.
From the other side of the world, China’s GDP for the third quarter will be released. The GDP is expected to inch down to 7.2%. This figure could actually be much lower in reality and as China keeps powering down, commodities are likely to follow and also decline. If the report comes out with even lower numbers, this could also bring down gold and silver.
Following the modest recovery in gold, the demand for gold as an investment slightly rallied — gold hoards in the GLD ETF, the world’s largest gold ETF rose to 760.94 tons by the end of last week – nearly 0.2% above the previous week but it’s still down by 0.9% since the beginning of the month.
Finally, the recent dive the U.S stock market took as the S&P500 fell by 3.1% last week. This recent market reaction also coincided with the rally of GLD and SLV. If the U.S equities change course and bounce back next week, this may also coincide with GLD and SLV’s downward shift.
So the bottom line…
My guess: The slow recovery in gold and silver may not last long especially if China’s GDP doesn’t meet the current expectations and the U.S. economic reports show signs the U.S. economy is on track to recover. The recent flash crash in the U.S. equities seems to have been a bit of a harsh reaction and driven by margin calls and long squeezes in major stocks.
For further reading: