Gold and Silver Outlook for June 13-17

The market sentiment remains bearish in the markets – in part driven by the lingering adverse impact the disappointing NFP report. This sentiment helped bring down long term interest rates, which in turn, also coincided with the recent rally of gold and silver prices. Looking forward, the main event of the week – the FOMC meeting – could provide another boost for precious metals. Other reports and events to consider are: U.S. retail sales, CPI and industrial production. Let’s breakdown what’s next for gold and silver for the week of June 13-17.

The FOMC meeting will include an update to the economic outlook, the dot plot and as press conference. Chair Yellen will try to keep the markets calm and not give too much away as to the timing of the future rate hikes. In the upcoming meeting the market places very little chance of a rate hike – which makes sense given the Brexit referendum the following week – and the focus will be on the tone of the statement, the press conference and the dot plot to see if the Fed still believes of raising rates in the coming months.  As of the end of last week, the implied probability of a rate hike, based on Fed-watch, slipped to 2% in June; for a July hike the chances also declined to 21% and for December the odds declined to 54%.

In the past couple of FOMC meetings the bullion market reacted positively as indicated in the following table.

fomc statment gold and silver May

Source: Bloomberg, FOMC

And this time the more likely scenario is that the market will react, yet again, positively to the FOMC statement, given the current market expectations and the recent economic data. Let’s breakdown to the three main scenarios that could play out for this upcoming FOMC meeting.

  1. Keeping a balanced statement: This is a very likely scenario, which isn’t far off the tone Yellen presented in a recent talk. This means, the Fed will keep the possibility of raising rates in the coming months and not change the dot plot – i.e. the FOMC will still project two rate hikes. This could still be perceived as moderately dovish and slightly have a positive impact on gold and silver prices;
  2. Taking a bit more dovish tone: This is a less likely scenario but is still a viable possibility. In this case, the FOMC will reduce its outlook of raising rates from two to one in the dot plot and will show a bit more concern over the progress of the U.S. economy. The NFP report was disappointing but could still be a one off (and let’s not forget wages still grew at a steady pace of 2.5%). So that’s why the FOMC is less likely to take this approach. In any case, in such a scenario gold and silver prices will sharply rise as they did back in March;
  3. Presenting a bullish/hawkish report: Considering inflation is still subdue and the NFP report wasn’t impressive, this scenario is even less likely; but if the FOMC statement and economic outlook show the FOMC is more incline to raise rates perhaps as soon as July, this could bring down gold and silver prices.

These aren’t the only possibilities but they seem to be the more likely scenarios to occur. Again the FOMC could still heavily hint of raising rates in July – which will basically be the same as raising rates this time – but that won’t serve the FOMC’s aim to keep the options open in case of a Brexit or another disappointing NFP report.

Other reports to consider that could also move markets include retail sales and CPI. If retail sales show strong figures this could serve the FOMC towards considering raising rates in the coming months and reduce the bearish market sentiment, which doesn’t help the bullion market. And the CPI report could also show if the core inflation is picking up again or remains low. Any hints of rising inflation could raise the chances of a rate hike.

ETFs holdings: By the end of the previous week, gold holdings of the gold ETF SPDR Gold Trust (GLD) rose again by 1.4%, week on week, to 893.92 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) also rose by 0.9% to 340.4 million ounces.

What’s next?

The upcoming FOMC meeting isn’t likely to present any major changes from the previous report when it comes to the dot plot or economic outlook. Chair Yellen will try to keep the markets guessing as for the timing of the next rate hike. But any lack of commitment for a rate hike in June or July could still be perceived as dovish enough for precious metals and drive further up their prices in the short term.

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