Gold and Silver Outlook for December 5-9

Despite the relatively good NFP report – at least in terms of unemployment and jobs growth – gold and silver bounced back on Friday after mostly falling throughout last week. Moving forward, the focus in the markets will shift to Europe with the fallout of the Italian referendum and the upcoming ECB monetary policy meeting. For now, the markets expect more stimulus from Draghi, which should drag down the Euro. For gold and silver a stronger dollar could drag further down their prices.  Besides the ECB rate decision, in the U.S. the main reports to come out this week include the non-manufacturing PMI and consumer sentiment.

The NFP report showed, yet again, a stable growth in jobs but didn’t present higher growth in wages – only 2.5% compared to 2.8% in the previous report; this is probably one of the main reasons for the modest gain in bullion prices as it slightly reduced the odds of a hike in December: The implied probability slipped to 92.7%. And as you can see in the table below the markets currently expect roughly one more hike in 2017; in comparison, the FOMC predicted two hikes in 2017. Given the recent developments in the markets including the rise in inflation expectations the markets may need to raise these estimates to 2 hikes as the Fed expected.

rates

Source: CME

And for gold and silver higher cash rate will likely to translate to more downward pressure as interest rates rise. Besides the direction of bonds, the stronger USD has also been playing a role in reducing the demand for both gold and silver. After all, the bullion holdings in the two leading gold and silver ETFs: SLV and GLD, respectively, experienced a sharp drop of 4% and 9% over the last couple of months. But this negative sentiment doesn’t mean we won’t see some choppy trading in the near term. After all, the ECB could surprise with a lower than expected stimulus package – perhaps reduce its QE program or hold off any extensions for now – which will help strengthen the Euro and in the process pull up gold and silver prices.

Final point

The general direction of gold and silver is likely to remain downward over the coming months – assuming there won’t be any new major surprise in the markets – but we could see some short terms rallies especially if U.S. economic data falls short of market estimates and the ECB turns a bit more hawkish than currently expected.

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