Gold and silver gained momentum last week as Britain voted to leave the EU. And even though equities have recovered, the high uncertainty in the markets is likely to preserve the risk-off market sentiment, which only benefits bullion prices. Besides digesting the potential ramifications of a possible Brexit, this week will also be about the Fed’s next move as the NFP report and minutes of the previous FOMC meeting will be released. These reports could curb down the recovery of precious metals if they were to revise up the current outlook of the market regarding the Fed’s cash rate for this year. Other reports and events to consider include: U.S. non-manufacturing PMI, RBA’s cash rate, BOE governor Carney talks, and U.S. factory orders. So let’s review what’s next for precious metals for the week of July 4-8.
Since the results of the Brexit vote were revealed gold prices gained over 6% and silver – 12.8%. And their recovery continued all through last week as they even gained more momentum at the end of last week as they both finished the week strong. It should be noted that even though equities have bounced back since the Brexit vote, interest rates are still down; also the U.S. dollar and the Yen have strengthened against other major currencies – mostly the British pound and Euro. But the recovery for the USD didn’t seem to impede the progress of the bullion prices. It seems that as long as interest rates continue to come down, gold and silver will thrive. And the market has also pushed down the odds of a rate hike by the Fed this year: Based on Fed-watch, by the end of last week the implied probability of the cash rate suggest there is a 1.2% chance of a rate cut in July; for September, again, a 1.2% chance of a cut; and for December the odds of a hike are only 14% but there is also a 1% chance of the rates coming down by 25 basis points.
These odds may be too low than were the FOMC would have wanted them to be. But given the recent Brexit vote it stands to reason that the Fed won’t move forward with its plan to raise rates this year. The minutes of the FOMC meeting from back in June, could shed some light on this matter. Keep in mind the Fed revises the minutes up to the last moment so we could see a bit more talk about the global risks and their impact on the Fed’s decision. But if we were to see a bit more hawkish/bullish minutes this could curb back down the recovery of bullion. Also, the NFP, which was very disappointing the last time – only 38K jobs gained – helped drive up bullion prices. This time, the market expects a higher number of 181K; anything lower could push further up gold and silver and raise the chances of a rate cut this year. But if the report shows a much higher than expected gain – say over 200K jobs – and wage growth at least maintains a pace of 2.5% in annual growth or higher, this could bring back down gold and silver prices – as was the case back in April, the last strong NFP report.
Source: BLS, Bloomberg
ETFs holdings: By the end of the previous week, gold holdings of the gold ETF SPDR Gold Trust (GLD) increased again – for the fifth straight week — by 1.7%, week on week, to 950.05 tons of gold; silver holdings, however, for the silver ETF iShares Silver Trust (SLV) decreased by 4.5% to 333.5 million ounces.
The market sentiment still favors gold and silver as the uncertainty in the markets isn’t likely to subside anytime soon and interest rates are still expected to come further down. But if the NFP report beats expectations with a gain of over 200K in jobs and strong growth in wages this could reverse the course of precious metals prices and bring them down by the end of the week.
For further reading see:
- 3 Markets – 3 Totally Different Brexit Reactions –MM #108
- Financial Market Preview for July 4-8
- The Fed Didn’t Raise Rates Again – Shocker!
- The Road to Rate Hikes (or not) — MM #102
- U.S. NFP Disappoint Again Only 38K Jobs; Wage Growth – Stable at 2.5%
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