Gold and Silver Outlook for January 25-29

Gold and silver prices slightly rose last week as the ECB promises more stimulus to follow, which could keep the U.S. dollar strong against the Euro. This week, the main event is the FOMC meeting that could impact the direction of gold and silver prices. The Fed is likely to refer to the recent market developments. Other main reports that will be released this week include: U.S. GDP for Q4 (first estimate), housing figures, consumer sentiment. So let’s breakdown what’s next for gold and silver for the week of January 25-29:

The ECB didn’t budge on its monetary policy, but the ECB President Draghi did promise more stimulus to follow in the coming months. He didn’t specify what kind of stimulus but we can assume it may include additional reductions to the deposit rate and augment the QE program. In any case, we could see the Euro continues to slide, which may, indirectly at least, keep pressuring down gold and silver prices – because if the USD appreciates against the majors, this doesn’t help commodities prices in general and precious metals in particular.

But let’s turn to the main event of the week: the FOMC meeting. This will be the first meeting for the year. The U.S. economy – at least the labor market – has shown signs of recovery. The concerns over China, weak retail sales, plunge in equities, additional fall of commodities are just some of the issues that the FOMC members will have to consider, even though these issues aren’t directly related to the Fed’s dual mandate. It’s still too early to determine whether the Fed’s recent rate hike was a mistake, but the current market conditions aren’t helping. And this could mean the Fed may postpose its rate hikes – based on the Fed’s dot-plot the next hike should have been in March. Based on recent market developments, the Fed should present a dovish statement to help calm the markets – at least as best as it can.

fomc statment gold and silver Jan 23

Source: Fed and Bloomberg

As of the end of last month, based on Fed-watch, the implied probability for a March hike slightly rose to 29%; for a June hike the chances were 39%. By the end of the year, the market still expects the Fed’s cash rate will be, on average, 0.67% — slightly more than one rate hike.

If the Fed releases a dovish statement – bear in mind there is no press conference or revised outlook this time – this could help, even if over the immediate term, push up gold and silver prices.

The other main report of the week is the GDP for Q4. This will be the first estimate. Currently the market expects a 0.8% gain. Even though the correlation between gold and the GDP surprise is next to zero, the USD/Yen and GDP surprise is positive at 0.52. And the correlation between USD/Yen and gold is also strong at -0.38. So there could still be an indirect relation between the GDP surprise and the direction of gold. In any case, the surprise of the GDP will be mostly important for the direction of USD and equities and less to gold and silver.

gdp and gold

Source: BLS and Bloomberg

But it could be another factor that the FOMC members will take into account in their decision (they are likely to get a preview of the estimate). So if the GDP comes out even lower than expected, this could influence the FOMC members to postpone their decision to raise rates.

In terms of ETFs holdings: By the end of last week, gold holding of the gold ETF SPDR Gold Trust (GLD) rose again by 0.95%, week on week, to 664.17 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) declined by 1.1% to 311.6 million ounces.

Bottom line

Gold and silver didn’t do much last week, but they could resume their rally from the beginning of the year if the Fed winds up releasing a dovish statement. Also, if the bearish market sentiment, which has subsided by the end of the week, resumes, this could also drive up the demand for precious metals. But if the Fed doubles down and doesn’t backs off from its hawkish stance this could result in additional selloffs of precious metals.

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