In the past couple of weeks there has been a bit of disconnect between gold and silver: As silver slightly picked up while gold continued its downward trend. And this week’s FOMC meeting could continue to keep them apart especially considering the markets expect to raise rates. Besides this event, other economic reports and events that could also move markets include CPI, retail sales and two other rate decisions by BOE and SNB.
As of the end of last week, the implied probability slightly rose to 94.9%. So basically a rate hike is already fully priced in to the bonds markets and as such shouldn’t have a big adverse impact on gold and silver prices as it tends to be the case when the Fed turns more hawkish – see the table below for the reaction of bullion prices to the FOMC’s statements.
Source: FOMC and Bloomberg
In fact it should be pointed out, however, that back in December of 2015 when the Fed raised rates gold prices picked up while silver tumbled. And this could suggest that the big selloff in gold and rally in silver may change direction again if history were to repeat itself.
But then gold and silver could both decline this week following the FOMC rate decision, because back in December 2015 the main change was a downward revision in the Fed’s outlook vis-à-vis its median cash rate for 2017. And the Federal Reserve, much like this time around, also set expectations in December of last year to raise rates by 25 bp. The main difference was the change in outlook. So this could be the main point that will move gold and silver prices – will the Fed revise its guidance about the cash rate? As of September, the Fed predicted two hikes for 2017 and the market currently prices in around 1-2 hikes. If the Fed were to reiterate its guidance of two hikes in 2017 this could still be construed as a dovish hike, which will be enough to pull back up a bit precious metals. And the Fed isn’t likely to revise down its cash rate outlook considering the rise in inflation expectations. So at best the Fed won’t revise its guidance – which could result in a modest rally for gold – or the Fed may revise up its cash rate guidance – the first upward revision in years – that will be considered a hawkish move and lead to more selloff of bullion.
The harsh times gold has had aren’t likely to change anytime soon. If the Fed were to go along and maintain its guidance for the cash rate for the coming years and only raise its cash rate, this could be help slowdown the fall of gold this week. Any change in guidance or surprise in the rate decision could otherwise drag further down bullion prices.
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