Gold and Silver Outlook for August 29- September 2

Bullion prices took another beating in the past week as the markets are slowly raising the chances of rate hike this year by the Federal Reserve. But this could all change if the upcoming NFP report falls short of market expectations. Besides the NFP, other reports that will be released this week include: U.S. manufacturing PMI, China manufacturing PMI, U.S. PCE, U.S. factory orders, and EU flash CPI. So let’s review what’s next for gold and silver for the week of August 29-September 2:

For investors the main event of in Jackson Hole was Yellen’s speech, in which – no surprise here – she didn’t provide much more insight about what’s next for the FOMC. She pointed out that the economic conditions in the U.S. have improved, which could lead to a rate hike this year but there is also a lot of uncertainty in the markets. The Vice Chair of the FOMC Fischer was more hawkish and tried to reiterate that September is alive event and the markets should expect a possible rate hike as soon as next month. Following these talks, by the end of last week, the implied probability for a September rate hike rose to 33%; and for December the odds have increased to 59%. If this trend were to persist, gold and silver prices are likely to suffer.

Looking forward this week, there are several key economic reports coming out of the U.S. leading up to Friday’s NFP report including: Consumer confidence, manufacturing PMI and PCE. If these reports show better than expected results, they could also bring down interest rates in the U.S. and strengthen the U.S. dollar. But the main event of week will be the NFP report. Currently, the market expects a headline figure of 186K jobs, which is lower than the number recorded last month (255K); if this report beats market estimates, as was the case in the past couple of months, this news could further weaken the demand for gold and silver.

Keep in mind that the correlation between precious metals (mostly gold) and the surprise in the headline figure is strong and robust, as indicated in the table below.

gold and nfp reg

Source: My calculations

The table above shows the linear regression of the percent change in the price of gold on the day of the release of the NFP report, in which the explanatory variables are the surprise in the headline figure and percent change in the USD/Yen. As you can see, these two variables alone explain 36% of the variance of gold price movement over the past three years. Moreover, both variables are statistically significant. This means even after controlling for the impact the NFP report had on the USD, the surprise still had a significant impact on the direction of gold price.

ETFs holdings: By the end of last week, gold holdings of the gold ETF SPDR Gold Trust (GLD) edged up by 0.1%, week on week, to 956.6 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) rose again by 0.4% to 356.894 million ounces.

Bottom line

The bullion market isn’t likely to perform well this week considering the markets are slowly revising up their estimates of a possible rate hike this year. And if the NFP report shows another higher-than-expected gain in number of jobs, this could only further fuel talks of possible rate hike this year – talks that aren’t likely to help much gold and silver in the short run.

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