Gold and Silver Outlook for February 1-5

Gold and silver prices rallied again last week but mostly at the start of the week before the FOMC released its statement, which was considered by many balanced. This week the NFP report could move gold and silver prices. But there is also news coming from China on manufacturing PMI – this could steer back the conversation towards the tribulations of China’s economy. And so far this year, the growing concerns over a global economic slowdown – in part due to direction of the Chinese economy – could drive back up, even if for a short term, the demand for precious metals. Other reports from the U.S. to consider this week including: manufacturing and non-manufacturing PMI, factory orders, and core PCE. So let’s examine what’s up ahead for gold and silver for the week of February 1-5:

As expected to Fed didn’t raise rates and addressed market volatility, low inflation rate and possible slower growth in the U.S. But the reaction for gold and silver was a bit, as presented herein, underselling. Perhaps bullion investors were expecting for a more dovish tone statement.

gold and fed

Source: Fed and Bloomberg

Following the rate decision, based on Fed-watch, the implied probability for a March rate raise fell to 15%; for a June hike the chances were lowered to 33%. By the end of the year, the market still expects the Fed’s cash rate will be, on average, 0.55% — less than one rate hike. And the chances of hike fell from 72% to 53%. So the market is less incline to believe there will be even a single hike in 2016.

The big event of the week will be the NFP report for January. After three solid reports that showed strong buildup in jobs, steady unemployment and rise in wages, all eyes will be to see if the NFP report starts to show slower growth or a possible reversal in job gains – the low GDP growth rate and disappointing consumer spending reports may start to show in the jobs reports. If so, this could further raise the chances of nary rate hike this year by the Fed – another short term boost for PM prices.

In terms of market reaction, as you can see below, the PM prices tend to react to surprises in the headline figure.

U.S.Labor Feb gold 2016

Source: BLS and Bloomberg

The linear correlation between the daily percent change of gold and the surprise in the NFP headlines figure is -0.49, which is a strong and negative correlation. So if the NFP shows a lower than expected gain in jobs – this week the market estimates a gain of 192K – then gold and silver prices may rise on Friday.

When it comes to changes in ETFs holdings: By the end of the previous week, gold hoards of the gold ETF SPDR Gold Trust (GLD) increased again by 0.76%, week on week, to 669.23 tons of gold – it’s up by 4.2% since the beginning of the year; silver holdings for the silver ETF iShares Silver Trust (SLV) fell again by 0.7% to 309.5 million ounces.

Final point

Precious metals rallied last week, but their recovery slowed down in the past several days: The Fed, as expected, experienced its concern over global economic gloom and low inflation, which could remain low for a while. This statement wasn’t enough to keep driving up gold and silver as it wasn’t too dovish or unexpected. This week, however, if the NFP shows lower than expected results and the bearish market  sentiment, which has subsided in the last few days, returns – mostly if China’s economic woes get back to center stage – then PM prices could see further short term gains.

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