Precious metals will face another stormy week with the upcoming FOMC meeting. Following the latest ECB monetary meeting that concluded with rate cuts and augmented QE program, gold and silver moved in an unclear trend on a weekly scale and slightly declined by the end of the week. This week, the focus will shift back to the U.S. with the FOMC meeting and other reports that will be released include: JOLTS, CPI, PPI, housing starts, industrial production and consumer sentiment. And in Japan the BOJ will also convene for a rate decision. How will all these events move gold and silver? Let’s take a look:
The main event of the week will be the next FOMC meeting, which will include a press conference, and release of economic projections. This time, the market doesn’t expect any changes to policy and Chair Yellen will try not to rock the boat and convince us that the Fed is still on course to raise rates this year, even if at a slower pace than estimated in December 2015. This means, the dot plot chart will have to be revised. Since the Fed isn’t likely to raise rates in the forthcoming meeting, the dot plot is likely to be revised to imply fewer than 4 rate hikes, possibly two or three. According to Fed-watch, the implied probability for a March rate remained at 0%; for June the chances of a hike rose again to 43%. And for December, the odds also increased to 75%. But the market also added back the 0.25% rate benchmark, which means the market places a positive chance, albeit small, for a rate reduction. So the market still expects no more than a single rate hike. And the Fed is likely to remain hawkish without revising the dot plot too much at this stage – hence the two-three rate hikes.
The expected scenarios are:
- Most likely – Slightly hawkish: No change to policy, keep the rhetoric nearly unchanged. The dot plot will be revised down to suggest no more than 3 rate hikes;
- A bit less likely – Balanced: Also no change to policy, but a bit more balanced rhetoric that will leave the door open backtrack from additional hikes and voice more concern over the state of the U.S. economy – mostly when it comes to inflation and GDP – global economies woes, and the shift in central banks’ monetary policy – including BOJ and ECB.
- Very low chance – Hawkish/Dovish: In either way, turning more hawkish, e.g. suggesting a rate hike in the June meeting or sooner, or turning more dovish e.g. planning not to raise rates again this year – a sharp revision in the dot plot to 0-1 rate hikes – will result in much more harsh reaction in the markets. This scenario is possibility but very unlikely.
In terms of the impact on gold and silver. Last time, bullion prices reacted negatively to the balanced statement. But since then precious metals rallied.
Source: Fed and Bloomberg
If the Fed keeps the door open to raise rates – and more than 2 hikes as will be indicated in the dot plot – it is likely to bring further down PM. But if the Fed turns dovish and voice concern over the state of the U.S. economy, this could bring further up gold and silver prices.
In the U.S. there are several other reports that will be released including CPI, retail sales and JOLTS. If these reports show the U.S. economy is progressing, they could also help pull up precious metals prices.
Finally, in Japan the BOJ will also convene for a rate decision. This time the expectations are high for a policy change, which could pressure down the yen. And a stronger U.S. dollar could curb down the recovery of gold and silver.
ETFs holdings: By the end of the previous week, gold holdings of the gold ETF SPDR Gold Trust (GLD) rose again for the tenth straight week, last week alone by 0.7%, week on week, to 798.77 tons of gold – up by 24.35% year to date; silver holdings for the silver ETF iShares Silver Trust (SLV) also increased by 2.5% to 325.8 million ounces.
So what’s next?
The bullion market could face another turbulent week that will end with another fall in prices – especially if the Fed keeps its hawkish stance. The Fed isn’t expected to rock the boat but maintain its stance to raise rates several times this year, which doesn’t help much gold and silver. Moreover, the U.S. dollar could start losing ground again against the Euro as the ECB rate cut and QE expansion keeps moving markets and devaluing the Euro. And a stronger U.S. dollar is likely to further pressure down precious metals.
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