Gold and Silver Outlook for May 2-6

The bullion market rode again on the coattails of the weaker USD – as it devaluated mostly against the Yen and Euro – following the FOMC’s statement, which was mostly positive about the U.S. economy but didn’t offer any hints of the timing for the next rate hike. Also, the BOJ decided to keep rates unchanged, which helped drag down equities and pull up the Yen. For gold and silver this news helped boost up their prices – as well as other commodities prices. This week, the NFP report will take center stage. Another stronger than expected report could prompt selloffs of precious metals and curb their recent recovery. Other reports that could move the bullion market include: U.S. factory orders, U.S. and China’s manufacturing PMI, RBA’s rate decision, U.S. non-manufacturing PMI. Let’s review what’s up ahead for gold and silver this week.

Following the plunge in the USD, commodities prices benefited from this trend; by the end of last week, gold and silver prices by 5% and 5.4%, respectively. But this recovery could come to a halt if the upcoming NFP shows another strong report. As you can see below, gold and silver prices tend to have a negative correlation with the headline figures surprise. And for now, the market expects a gain of 206,000 jobs, so a higher headline figure could curb down bullion prices.

U.S.Labor April 2 2016

Source: BLS, Bloomberg

But the headline figure isn’t the only data point the market looks forward. Another data point is the change in wages, which play an important role in determining whether the FOMC moves towards considering raising rates again. So if wages continue to pick up – as of last month wages grew at an annual rate of 2.3% and by 0.3%, month over month. So if wages were to keep rising at 2.3% or higher, this could also be considered a positive sign for the state of the U.S. labor market.

As a side note, this week FOMC member Bullard is expected to speak at the County Economic Summit, in Santa Barbara on Thursday before the NFP report comes out. He tends to lean more towards raising rates sooner rather than later so his comments could also impact the market perception of where cash rates in the U.S. are heading.

And the NFP report could also move the chances the market gives for a Fed rate hike: According to the recent Fed-watch update, the implied probability for a June hike slid to 11%; for a September hike the chances also declined to 41%. And for December, the odds fell to 59%. And if the NFP report were to present better than expected growth in jobs, this could be enough to slightly raise the odds of a rate hike, and drag down gold and silver prices.

Finally, it’s not all U.S. this week, the Caixin  China Manufacturing PMI report will be released on Tuesday and is expected to show a modest gain towards 49.8, which still means the manufacturing sector in China is contracting. Any higher figure could suggest China’s economy is heating up, which may behoove commodities in general and silver in particular.

ETFs holdings: By the end of last week, gold holdings of the gold ETF SPDR Gold Trust (GLD) slipped again by 0.11%, week on week, to 804.14 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) increased by 0.7% to 337.0 million ounces. The modest decline in GLD’s holdings suggest some gold bugs are pulling out of gold, despite the recent gold rally.

Final point

The recent rally of precious metals could come to a halt by the end of the week if the NFP shows stronger than expected report. But if the report comes short of market estimates, this could prompt more purchases of gold and silver prices.

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