Gold and silver took another hit this week mainly after the minutes of the last FOMC meeting were released and managed to convince the market that a June rate hike is a viable option – albeit the chances are still low. The rise in interest rates and rise of the USD helped pressure back down precious metals prices. Looking forward the market will keep looking for clues of a possible rate hike based on the forthcoming U.S. economic data. This week’s main reports and events to consider are: U.S. GDP for Q1 (second estimate), BOC’s rate decision, GB’s GDP for Q1, U.S. new and pending home sales, EU manufacturing PMI, and U.S. core durable goods. Let’s breakdown what’s next for the gold and silver for the week of May 23-27.
The Fed was able to convince the market that a rate hike is plausible as soon as June; after all, the market raised up the implied probability of a rate hike, according to Fed-watch, to 26% in June, 64% in September and for December the odds have also picked up to 80%. But even though the chances have picked up, the market still puts low chance of a rate hike this summer and only 40% of more than a single rate hike. Also, the weighted average of the Fed’s cash rate has risen to 0.71% — a week earlier the average was 0.58%. So while the market places a bigger chance of higher rates, interest rates are still expected to remain low. And as long as rates are low, they will help keep gold and silver up. Looking towards this week, let’s consider two U.S. economic reports to consider:
- U.S. GDP for Q1 (second estimate): This will be the main event of the week in this otherwise light-on-news-week; in the first estimate the GDP for Q1 was 0.5% whilst in the second estimate the market expects the GDP growth rate to edge up to 0.8%. The main area that was weak in the recent report – which the FOMC also pointed out – was investment; it contracted by 1.6% — mostly due to a sharp drop in non-residential sector. Consumer spending rose by 1.9% in Q1 – a solid growth rate. For the upcoming report, any higher rate than currently expected could suggest the U.S. economy is progressing well. And the Fed will be more incline to raise rates – a shift that could bring further down gold and silver prices;
- U.S. core durable goods: Currently, the market expects core durable goods bounced back by 0.3%; and much like the GDP report, if this report shows a higher a rates, this could also diminish the demand for bullion.
ETFs holdings: By the end of the previous week, gold holdings of the gold ETF SPDR Gold Trust (GLD) increased again by 2.1%, week on week, to 869.26 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) also rose by 0.3% to 336.02 million ounces.
Gold and silver haven’t done well in the past couple of weeks; and if the market were to keep revising up its estimates of the chances of a rate hike, bullion prices could continue to fall. Also, the USD kept rising, which drove down precious metals. If the U.S. economic reports continue to show better than expected results and the uncertainty in the markets diminishes, gold and silver could face another week of falls.
For further reading see:
- Financial Market Preview for May 23-27
- Markets vs. Trump vs. Clinton — MM #100
- Oil’n’Gold Merry Go Round –MM #91
- What’s Up Ahead for Precious Metals in 2016?
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