With the year winding down as we are heading towards the last week of 2016, the markets are likely to demonstrate – as they did last week – low volatility and liquidity. For precious metals, this could be a chance to present some short term gains even though the market hasn’t done well since the U.S. elections (although to be fair both gold and silver have been losing steam even before that). So what’s next for gold and silver?
Since the elections bullion prices have experienced a plunge in their prices: 11% for gold and 14.5% for silver. And now the drop in prices isn’t only due to the shift in market expectations about where the U.S. economy is heading under the Trump administration; it also has to do with the stronger dollar, which has been gaining momentum even before the U.S. election on the backend of the expectations for tighter monetary policy by the Fed all awhile the other central banks – notably BOJ and ECB – keep provide stimulus in their economies.
And based on the latest estimates, the markets price in the possibility of three hikes by the Fed by the end of 2017 (albeit the chances range between 2 and 3 hikes: The implied probability for a June hike is 72%; for two hikes by December the odds are at 77%). I think this outlook is a bit overoptimistic considering the rally in the USD, which is likely to import more deflation to the U.S. economy and curb inflationary pressures. This could eventually lead to a correction in the bond market, which, in turn, may also boost the demand for gold and silver. As of the end of last week, the demand for gold and silver in the leading ETFs has plunged by 14% and 7%, respectively, over the last two months.
But until the markets realize the Fed may be more dovish and the fiscal stimulus is likely to be less than anticipated, gold and silver aren’t likely to gain much back; and the stronger USD and higher yields are likely to keep pressuring down bullion prices.
The recovery of gold and silver isn’t likely to happen until the markets revise their outlook about the U.S. monetary and fiscal policy; bullion prices could see some short term gains as the USD loses some momentum and yields slide back down. But the major shift in sentiment isn’t likely to occur in the near term. This shift could start if we were to see some less-than-encouraging economic data coming out of the U.S. The latest confidence report – the only major economic report for this week – showed strong figures so it isn’t likely to change much market sentiment. This report came after the GDP growth rate came a bit higher than expected. Perhaps the upcoming NFP report that will be released on the first week of 2017 could be the report to bring back up bullion prices. Until then, the low liquidity is likely to keep pushing prices in an unclear trend this week.
For further reading see:
- What Will Move Markets in 2017 — MM #128
- The Fed Raises Rates – But Now Everyone Is Paying Attention
- The FED and the Road Ahead — MM #127
- From The Crude Cut To Draghi’s Drag — MM #126