The British referendum ended with a surprise result as around 52% of the voters decided to leave the EU. This decision shook up the financial markets with the British pound falling by 8% against the U.S. dollar and the Euro by 2.3% on Friday. This news has also reduced the odds of a rate hike by the FOMC this year. Not only that, the markets are also pricing a possible rate hike. And for gold and silver this news – the Brexit vote and lower chance of rate hike by the Fed – is likely to keep push up their prices in the near term. This week will continue to be all about the Brexit and what does it mean to the markets, the EU (will other EU members consider leaving?), and the direction of the global economy. Keep in mind there are several reports that will be released this week in the U.S. to consider such as: GDP for Q1 (final estimate), consumer confidence, core PCE, and manufacturing PMI. So let’s examine the recent market developments and their ramifications on precious metals for the week of June 27- July 1.
The surprising Brexit vote helped bolster the demand for gold and silver as the market remains in the risk off mode. Currently, the markets are still trying to figure out what to make out of this Brexit vote, how to deal with it and what’s next for the EU, Britain and the rest of the global economy. For gold and silver this news was uplifting as their prices rallied on Friday. And even though the U.S. dollar has strengthened against the British pound and Euro it actually weakened against the Yen. So even though the dollar is likely to further strengthen in the coming weeks, it isn’t likely to impede by much the progress of precious metals prices. In terms of interest rates, the 10-year U.S. treasury yield dropped to 1.57%, which represents a 27 basis points fall since the start of the month and 70 basis points since the start of the year. And as we know, lower rates only helps pull up gold and silver prices.
Now that the Brexit vote is behind us the market also revised down the outlook for the Fed’s cash rate this year – perhaps even too much: By the end of last week according to Fed-watch the implied probability of the cash rate suggest there is no chance of a rate hike in July and a 7.2% chance of a rate cut; for September, again, no chance of a rate hike and a 7.2% chance of a cut; and for December the odds of a hike are only 24% but there is also a 5.3% chance of the rates coming down by 25 basis points. And if the market were to keep reducing these odds, this will only keep driving up gold and silver prices. But keep in mind these odds are very low, perhaps even much lower than where Chair Yellen wants them to be. So if the upcoming U.S. reports including GDP, consumer confidence and core PCE show the U.S. economy is heating up, the Fed will want to consider raising rates (even though it won’t behoove the U.S. economy given its current state); as such, the Fed could try to hint of a possible rate hike in the next meeting just to bring the markets a bit closer to the Fed’s outlook. But until then the market is still likely to price in a low chance of any rate hike this year and perhaps even a cut if the upcoming U.S. economic data are disappointing.
ETFs holdings: By the end of last week, gold holdings of the gold ETF SPDR Gold Trust (GLD) rose again by 2.9%, week on week, to 934.31 tons of gold – the highest level since September 2013; silver holdings for the silver ETF iShares Silver Trust (SLV) increased by 3.6% to 349.4 million ounces.
What’s up ahead?
Whenever the financial markets experience high uncertainty they tend to shift assets to safe havens and precious metals tend to be among those assets. But be sure that this risk-off mode could eventually change course as it will become clearer how the Brexit will play out. But this could take months. The only thing that could curb down the recovery of bullion prices is if the upcoming U.S. economic reports beat expectations and rekindle the possibility of a rate hike this year by the Fed.
For further reading see:
- Financial Market Preview for June 27- July 1
- The Fed Didn’t Raise Rates Again – Shocker!
- The Road to Rate Hikes (or not) — MM #102
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