Gold and Silver Outlook for March 21-25

Gold and silver received another boost from the FOMC. The Fed, as expected, didn’t change its cash rate but it did revise down in the dot plot the outlook for the cash rate from 4 hikes to 2 this year. But that wasn’t all. The FOMC also addressed the concerns over the global gloom. And the FOMC also reduced in the dot plot the cash rate outlook for 2017-2018 and even for the terminal rate. As a result this recent statement was considered dovish, which helped drive back up gold and silver and even the USD devalued against other leading currencies. This week the markets are likely to further digest the latest FOMC decision. The main reports of the week include: U.S. GDP, core durable goods, new and existing home sales and EU manufacturing PMI.  

The Fed lowered its outlook for the 2016 cash rate. But that wasn’t all: The FOMC also reduced its terminal rate – which wasn’t expected – and in away was considered a dovish move: Now the Fed expects lower rates to remain so for a long period of time. This news helped push down the USD against the Euro and Yen. The reaction for gold and silver was also positive following this news as indicated in the following chart:

fomc statment gold and silver March

Source: Fed and Bloomberg

As you can see, the last time gold and silver react had a similar positive reaction to the news from the Fed was back in the September meeting. Gold alone, however, tended to recast positively to the Fed’s decision in recent meetings – in four of the last five meetings. So gold bugs have been taking the Fed’s decisions as a positive news (at least compared to silver investors). Following the latest FOMC statement, according to Fed-watch, the implied probability for a June hike slipped to 38%. The chances for a hike in September remained nearly unchanged at 60%. And for December, the odds also remained close to 75%. So the recent Fed decision didn’t have much of an impact on the market’s outlook of the Fed’s cash rate this year. Even though it did bring down long term treasury yields.

This week, the main reports of the weeks will be the core durable goods and GDP for Q4 (last estimate) in the U.S. and the Europe there is the EU manufacturing PMI. The GDP is expected to show a lower growth rate than in the previous estimate – 0.7% compared to 1%. If so, this could raise a bit more the anxiety level for an economic slowdown, which could behoove, at least in the short run, gold and silver prices.

ETFs holdings: By the end of last week, gold holdings of the gold ETF SPDR Gold Trust (GLD) increased for the eleventh straight week, last week by 2.5%, week on week, to 818.99 tons of gold – up by 27.49% year to date; silver holdings for the silver ETF iShares Silver Trust (SLV) also rose by 0.8% to 328.5 million ounces.

Bottom line

The Fed tried to turn a bit more dovish even without changing its cash rate but rather by lowering its outlook on where interest rates are heading. This news was good enough to bring down the USD and pull up gold and silver. Now the question is how long this trend will last. For now, the relatively slow week ahead will allow the Fed’s latest statement to resonate in markets. And this could suggest that in the near term as long as the USD keeps falling, LT rates keep rising – gold and silver are likely to keep recovering.

For further reading see: