The divergence in the bullion market continued for a second week in a row as silver finished the week up while gold – slightly down. This divergence, however, may not last long considering the busy week ahead that includes several key economic reports coming from the U.S. – such as GDP for Q1, core PCE, consumer confidence and new home sales — and an FOMC meeting. Between the economic figures and the FOMC statement the bullion market could face a sharp rise in volatility. Let’s breakdown what’s next for gold and silver this week.
Last week the ECB policy meeting concluded with no change to policy, even though the Euro has slightly devaluated against the USD. The USD has also gained some strength against the Japanese yen. The stronger USD may have contributed to the modest fall of gold prices. And this week may end up driving further down gold and silver prices if the FOMC were to release a hawkish statement. True, the Fed isn’t expected to raise rates this time, as indicated in the following table of the implied probabilities.
In fact based on Fed-watch, the implied probability for a June only slightly rose to 20%. The chances for a September hike also rose to 47%. And for December, the odds stood at 65% by the end of last week. But if the Fed were to hint of a possible hike in June this could result in a modest gain in interest rates and a possible stronger USD – two factors that are likely to bring back down precious metals prices. And since the market places a very low chance of a June rate hike, this statement could have a strong impact on gold and silver.
Conversely, the main economic reports including core PCE and GDP for Q1 could tilt the scales back towards leaving rates unchanged: the GDP for Q1 is expected to reach only 0.7% and the core PCE, which is the main inflation measure the FOMC follows, isn’t expected to pick up at a faster pace than last month. If these reports don’t show a higher than expected figures, the markets are likely to interpret these results as a sign that the Fed may not be so incline to raise rates in June.
ETFs holdings: By the end of the previous week, gold holdings of the gold ETF SPDR Gold Trust (GLD) declined again by 0.91%, week on week, to 805.03 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) rose by 0.4% to 334.7 million ounces.
Gold and silver could face selloffs if the FOMC were to surprise and release a more hawkish than expected statement. But if the upcoming U.S. economic reports – mainly GDP and PCE – disappoint and the FOMC were to maintain a dovish or even a balanced statement, the market is likely to react in favor, which will drive back up bullion prices.
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