Gold and Silver Outlook for August 17-21

The Chinese move to devalue its currency was a step in the right direction for China’s economy. But for now there are no expectations for any additional sharp changes in the value of the yuan. The bullion market seems to have benefited from the recent developments as both gold and silver rallied. This week the main event will shift back to the U.S. with the release of the minutes of the FOMC meeting. Other reports in the U.S. include: CPI, housing starts and Philly fed index. In Europe and China the flash manufacturing PMI will be released. For the complete overview for this week’s events see here.

Back in late July, the Federal Reserve didn’t announce of any big changes to policy and aside from small changes to the language mainly with respect to improvement in the labor market. So the market is still undeceive on whether the FOMC were to raise rates this year and if so when. And the recent move by China to devalue its currency hasn’t made things any simpler: Now a rate hike will make even less sense if the yuan were to keep falling and in effect make the U.S. dollar stronger against the yuan. Nevertheless, the U.S. dollar also devalued against leading currencies last week, which also provide some backwind for gold and silver.

The minutes didn’t have much of an impact on the bullion market this year, as you can see in the table below.

fomc minutesSource: FOMC, Bloomberg

Therefore, unless the minutes were to reveal any big hints about the next FOMC meeting in September, the minutes aren’t likely to stir up the prices of gold and silver this time either.

Some analysts tend to consider that if the statement is dovish, then the minutes tend to “soften the blow” and are presented in a more hawkish tone to balance the impact of the statement and shift back the pendulum. I don’t know, however, if the data support this theory and so far and didn’t see such a shift in the tone of the statements and minutes or a reaction in the market to support this claim.  In any case, the minutes are the last big report that the FOMC publishes before the September meeting, in which the historic rate hike could still be announced.  As of end of last week, the implied probabilities of rate hike in September rose to 45%; for December the odds also increased to 72%. Nonetheless, if China were to start devaluating further its currency, this could impede the Fed’s decision from raising rates to a later date.

By the end of last week, the gold holding of the GLD ETF has gone up for the first time in seven weeks – an increase of 0.62% to 671.86 tons of gold. It’s still down for the year by 5.7%. The silver holdings of the leading silver ETF SLV has declined again by 0.4% to 324.9 million ounces.

In conclusion…

The recent recovery of gold and silver may not last long and could change course, especially if the minutes of the FOMC were to present a hawkish tone and make people reconsider if a rate hike is on the table in September. Finally, if the U.S. dollar were to bounce back from its recent fall following the latest developments related to China’s devaluation of its currency, this could also pressure down gold and silver prices.

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